Description
The purpose of this study is to give an overview of the key financial reporting practices of central banks. With no common framework in use by all central banks, it is often difficult to determine whether the figures and other information reported are in fact comparable, and where any differences may lie
FINANCIAL SERVICES
Current trends
in central bank
?nancial reporting
practices
October 2012
kpmg.com
Contents
Foreword 1
About this study 2
Acknowledgements 2
Executive summary 3
1 Understanding policy instruments 4
1.1 Lending in domestic currency
and market interventions 5
1.2 Gold and foreign currency assets 7
1.3 Banknotes in circulation 9
2 Accounting frameworks and policies 12
2.1 Financial reporting frameworks 12
2.2 Securities and lending 14
2.3 Gold and foreign exchange 15
2.4 Other ?nancial instrument-related issues 17
2.5 Analysis of income and expenses 18
2.6 Presentation of cash ?ow statements 20
3 Capital management 22
3.1 Capital 22
3.2 Reserves 24
3.3 Pro?t remittance and treatment
of losses 25
4 Government interactions 26
4.1 Transactions with government 26
4.2 Other relationships 29
5 Financial instrument disclosures 30
5.1 Fair value disclosures 31
5.2 Credit risk 31
5.3 Liquidity risk 32
5.4 Market risk 32
6 Other risk management disclosures 34
6.1 Collateral 34
6.2 Contingencies 36
6.3 Other ?duciary functions 36
Appendix A 38
Glossary 39
Notes 40
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
A
Foreword
Open a newspaper these days and it seems impossible to avoid news
about the global ?nancial crisis, the eurozone debt crisis, the stalling
recovery of the US economy and the slowdown of growth in emerging
markets. Continuing pressures from various sources, following the
collapse of Lehman Brothers in 2008, have increased the fragility
of economies worldwide. In setting and executing monetary policy,
central banks have been forced to extend their role and intervene in
markets to levels never seen before.
lthough these activities re?ect
macroeconomic factors of a far
broader scope than simply the
central bank itself as an institution, the
?nancial statements of a central bank
do shed some light on the impact of
policy instruments and the risks related
to the various measures implemented.
A ?nancial reporting framework that
portrays the central bank’s ?nancial
position and results may enable
stakeholders to assess the state of local
conditions in more concrete terms.
Against the backdrop of these
developments and our 2009 study
Central bank accountability and
transparency, we now consider it
worthwhile to review again the current
status of ?nancial reporting practices
amongst central banks. Central
banks inevitably face a challenge of
comparability, given the uniqueness of
each institution and of the environment
in which they operate. The continued
move towards worldwide adoption
of IFRS has in?uenced the selection
of ?nancial reporting frameworks by
central banks and the extent to which
they comply with IFRS, yet challenges
still exist given the unique operations of
central banks.
Whilst this publication is primarily
written for central bankers in ?nancial
reporting roles, we hope that the
analysis of our ?ndings will also be
of interest to other stakeholders and
provoke informed discussion on some
of the key issues faced by central
banks today and how these can be
re?ected in a central bank’s ?nancial
reporting practices.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
1 Foreword
Jeremy Anderson
Global Head of Financial Services
KPMG in the UK
Ricardo Anhesini
Chair of the Central Bank Network
Advisory Group
KPMG in Brazil
About this study
The purpose of this study is to give an overview of the key ?nancial reporting
practices of central banks. With no common framework in use by all central banks,
it is often dif?cult to determine whether the ?gures and other information reported
are in fact comparable, and where any differences may lie. We aim to identify the
common themes where variety is found in practice, and to highlight some ‘outliers’
which are of particular interest. We also aim to provide industry context for our
results to help shed light on their signi?cance.
Our study is based solely on the ?nancial statements
of the central banks included in our population and
observations are made to the extent that information
was included in those ?nancial statements. We did not
take into account information that was available from
other sources – e.g. from other parts of the annual
report, the central bank law, or from other documents
on a bank’s website – as doing so goes beyond the
requirements of ?nancial reporting frameworks.
Our study is based on a population of 18 central banks,
selected in accordance with various criteria – these
included the ?nancial reporting framework used,
geographical region, whether an English language
version of the statements was available, and whether
recent ?nancial statements were already available at the
time we initiated our research; for most of the central
banks, the ?nancial statements for years ending in the
calendar year 2011 were available, but in some cases
we used 2010. The complete list of our population is
included in Appendix A.
Our study did not benchmark reporting practices against
any one speci?c framework and assess compliance. It
instead provides an overview of current industry practice
based on the various frameworks used by the central
banks included in our population. Inevitably, repeated
reference is made to widely-used frameworks, such
as IFRS or the ECB Accounting Guideline, but this is
simply to contrast the differences in standards and
practices against a basis that most readers can relate
to, and our goal is not to conclude on the relevance or
appropriateness of such frameworks.
Acknowledgements
We would like to acknowledge the principal authors of
this publication:
Michelle Finnegan
KPMG in Canada
David Schickner
KPMG in Germany
Richard Smith
KPMG International
Standards Group
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
2 Current trends in central bank ?nancial reporting practices
We would also like to thank the various reviewers,
including Maria Lee, Julie Santoro, Sylvia Smith,
Chris Spall and Jim Tang of the KPMG International
Standards Group (part of KPMG IFRG Limited), and
the members of KPMG’s Central Bank Network
Advisory Group listed on the back cover of this
publication.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
3 Executive summary
Executive summary
This study looks at six areas in central bank ?nancial reporting:
policy instruments and how they have changed during the ?nancial
crisis; accounting frameworks and policies; capital management;
government interactions; ?nancial risk disclosures; and other
disclosures relating to risk management.
As the ?nancial crisis has evolved, central banks have
become more active in their local economies. They have
implemented new policy instruments and expanded various
programmes. Our study found that, although the ?nancial
statements included varying degrees of disclosures on these
types of instruments, most central banks with signi?cant
market interventions provided key details. These signi?cant
movements and balance sheet expansions can however
impact the historical ratios of the balance sheet with respect
to central banks’ other key instruments, such as gold and
foreign currency assets. Despite this new focus, issuing
banknotes remains a key function, and represents the most
signi?cant liability on the balance sheet.
However, identifying these various new measures or policy
instruments is not always straightforward, as there is no
consistent ?nancial reporting framework used across all
central banks. IFRS as a reporting framework is increasingly
being used, but national legislation in certain jurisdictions still
permits central banks to select their accounting framework.
Accordingly, some central banks select IFRS as a starting
point and modify certain requirements given their speci?c and
unique function. Even with these modi?cations, and with the
use of various other frameworks, accounting policies for the
signi?cant assets and liabilities are largely consistent, and fair
value measurements are quite common.
Moreover, central bank capital remains an unde?ned
concept, and no practical guidance exists for calculating
appropriate levels of capital. Because of this, there was a clear
correlation between the accounting framework in use, the
pro?t remittance model, and accounting for reserves. Where
?exibility exists in the accounting framework, central banks
will often use liability accounts to provide for reserves with
respect to ?nancial instrument revaluations and other general
risks. However, central banks whose accounting frameworks
have tighter rules over the recognition of liabilities will use
equity allocations.
Given the relationship that central banks have with their
government, and the expectation that central bank pro?ts
are in most cases distributed to the government, central
banks often included disclosures about the relationship and
transactions with the government. In very limited cases,
central banks actually lend to their government, but the terms
of these agreements were clearly disclosed. Although not
common, some central banks have external shareholders, but
they generally have appropriate mechanisms to limit external
in?uence on the management of the bank. These often
include strict dividend policies and restrictions on external
shareholder involvement in determining or participating on the
management board.
As expected, the extent of ?nancial instrument disclosures
was mainly driven by the relevant ?nancial reporting
framework. Fair value disclosures varied, but most had
information available throughout the ?nancial statements.
In addition to disclosures about speci?c risks, as required
by IFRS, several central banks also disclosed information on
value-at-risk, which is often a key measure for commercial
banks. With increased collateralised lending, disclosures on
collateral were usually incorporated. However, the extent of
these disclosures was usually correlated to the amount of
risk disclosures on ?nancial instruments. Lastly, in addition to
monetary policy, central banks often perform other ?duciary
functions and they often disclosed risks arising from these
activities, including any potential contingencies.
1
Understanding policy
instruments
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
0
10
20
30
40
50
60
70
48%
49%
60%
63%
2011 2010 2009 2008
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
4 Current trends in central bank ?nancial reporting practices
Key issues & ?ndings
• As the fnancial crisis evolves, the role of central
banks is expanding and domestic lending is taking
on new forms.
• Most central banks that expanded their activities
during the crisis included disclosures on these
expanded roles.
• Gold can be an important asset and accounting for
its change in value has certain challenges.
• Central banks often manage their country’s
foreign currency reserves, and these represented
a signi?cant asset.
• Issuing banknotes remains a key function
and gives rise to the most signi?cant liability.
Accounting for this liability is largely consistent.
The past ?ve years have seen tough economic times for
?nancial markets, and in many cases central banks have
stepped in with a variety of unconventional measures in order
to provide stability and liquidity to the market.
These market interventions play an important role in a central
bank’s ?nancial position as they have led to a signi?cant
expansion of central bank balance sheets. Figure 1.1 shows
the average percentage change in total assets since 2008,
using 2007 as a baseline. It indicates that there was a
signi?cant increase in total assets in 2008 when compared
with 2007. This is consistent with the fact that 2008 marks
the start of the sub-prime crisis and central banks’ ?rst
unconventional responses to that crisis. There was also a
signi?cant increase in 2010 and is consistent with the onset of
the European debt crisis, which continued to affect 2011.
Figure 1.1: Average increase in total assets
Source: KPMG IFRG Limited, 2012
Figures 1.2 and 1.3 provide examples of how the level and
timing of interventions by central banks varied depending
on issues faced in local markets.
1
Discussion of the various
measures adopted and examples of these are in section 1.1.
Figure 1.2: Change in total assets – Non-Europe
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
2008 2009 2010 2011
Bank of Canada
46%
33%
24%
144%
14%
25%
165%
19%
219%
36%
145%
Bank of Russia Federal Reserve Banks
0%
50%
100%
150%
200%
250%
Source: KPMG IFRG Limited, 2012
Figure 1.3: Change in total assets – Europe
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
2008 2009 2010 2011
Banque de France
53%
40%
34%
22%
39%
73%
63%
113%
173%
27%
69%
Deutsche Bundesbank Swiss National Bank
0
50
100
150
200
Source: KPMG IFRG Limited, 2012
1.1 Lending in domestic currency and
market interventions
To increase liquidity, a number of central banks have been
making greater use of reverse repurchase agreements and
other forms of collateralised lending in their domestic markets.
Figure 1.4 shows the percentage of total assets represented by
lending in domestic currency for the past ?ve years.
A dramatic spike in domestic lending can be seen for these
banks. This increase speci?cally appears in 2008 and 2009 and is
consistent with the fact that some central banks used domestic
lending as a tool to increase market liquidity at the peak of the
sub-prime crisis.
Figure 1.4: Domestic lending – Non-Europe
1
Bank of Canada
0%
10%
20%
30%
40%
50%
60%
70%
Bank of Russia
Federal Reserve Banks
2011 2010 2009 2008 2007
D
o
m
e
s
t
i
c
l
e
n
d
i
n
g
a
s
%
o
f
t
o
t
a
l
a
s
s
e
t
s
Source: KPMG IFRG Limited, 2012
On the other hand, Figure 1.5 shows a gradual decline
in domestic lending for Banque de France, Deutsche
Bundesbank and the Swiss National Bank. However, only
looking at domestic lending does not re?ect the fact that
liquidity provision measures have taken on new forms.
1. These central banks were not selected as a representative sample of the population, but only to demonstrate a trend noted amongst
some banks.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
5 Understanding policy instruments Understanding policy instruments
For example, the Eurosystem introduced bond buying
programmes (discussed below) that involve central banks
directly buying assets in exchange for cash. This gives the
impression that liquidity is no longer being provided because
the volume of domestic lending decreases. However, the
difference is in the fact that Eurosystem central banks now
carry the risk of the purchased assets rather than the risk of
the loans made to the commercial banks.
Figure 1.5: Domestic lending – Europe
1
0%
10%
20%
30%
40%
50%
60%
2011 2010 2009 2008 2007
D
o
m
e
s
t
i
c
l
e
n
d
i
n
g
a
s
%
o
f
t
o
t
a
l
a
s
s
e
t
s
Deutsche Bundesbank
Banque de France
Swiss National Bank
Source: KPMG IFRG Limited, 2012
Speci?c examples of crisis intervention disclosures
With a few exceptions, there were no explicit statements on
crisis responses taken due to market conditions. The Bank
of England and the Central Bank of Kenya disclosed some
information on market support and its impact on ?nancial
reporting. For example, the Bank of England stated that “In
exceptional circumstances, as part of its central banking
functions, the Bank may act as ‘lender of last resort’ to
?nancial institutions in dif?culty in order to prevent a loss
of con?dence spreading through the ?nancial system as a
whole. In some cases, con?dence can best be sustained if the
Bank’s support is disclosed only when conditions giving rise to
potentially systemic disturbance have improved. Accordingly,
although the ?nancial effects of such operations will be
included in the Banking Department’s ?nancial statements
in the year in which they occur, these ?nancial statements
may not explicitly identify the existence of such support.” In
addition, other noteworthy disclosures are discussed below.
Bond buying programmes of the Eurosystem
The Securities Markets Programme (SMP) was introduced
by the Eurosystem as a way to intervene in public and private
debt securities markets in the euro area to stabilise the
markets and improve liquidity conditions when certain areas
of the euro debt securities market were malfunctioning.
The covered bond programmes were intended to ease
funding conditions of credit institutions, and encourage and
expand lending to customers. For all three programmes, the
European Central Bank disclosed the intended purpose of the
programme at a high level, with a speci?c reference to the
press release providing the complete details. Additionally, it
disclosed that it holds debt securities issued by the Hellenic
Republic, and discussed the impact of the private sector
involvement initiative announced in 2011. This initiative
was considered to be a voluntary restructuring of private
sector debt, and as such, the European Central Bank did not
expect any resulting changes to the contractual cash ?ows
associated with their holdings. Consequently, it did not record
any impairment losses on these debt securities.
As a result of these programmes, national central banks are
exposed to the risk of loss based on the mechanisms that
exist within the Eurosystem. To that effect, the Deutsche
Bundesbank stated, in relation to the SMP, that “all risks
from these operations, provided they materialise, are shared
among the Eurosystem national central banks in proportion to
the prevailing ECB capital key shares.”
Federal Reserve Banks fnancial stability activities
The Federal Reserve Banks provided signi?cant disclosures
in the ‘Financial Stability Activities’ note, which included ?ve
pages of detailed explanations. Activities disclosed included
the following two signi?cant interventions.
• Large-scale asset purchase programmes and reinvestment
of principal payments: Since 2009, the Federal Reserve
Banks have purchased securities worth approximately USD
1 trillion in a series of acquisitions intended to help improve
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
6 Current trends in central bank ?nancial reporting practices
conditions in private credit markets. These investments are
held under reverse repurchase agreements. An additional
USD 134 billion of assets were sold under repurchase
agreements. In addition, the Federal Reserve Bank of New
York was authorized to purchase up to USD 175 billion in ?xed
rate non-callable government-sponsored enterprise debt
securities and USD 1.25 trillion in ?xed-rate federal agency
and government-sponsored enterprise mortgage-backed
securities. The purchases were completed in March 2010.
• Support for speci?c institutions: Several variable interest
entities (VIEs) used loans to buy assets of the Bear Stearns
Companies, Inc. (Bear Stearns) and American International
Group, Inc. (AIG). These assets are consolidated in the
balance sheet of the Federal Reserve Banks because the
bank retains an economic interest in the VIEs.
Bank of England interventions
The Bank of England intervened in its local market, and
provided the following disclosures on programmes that were
new in previous years.
• Bank of England Asset Purchase Facility Fund (BEAPFF): In
2009, it established the BEAPFF to buy high-quality assets
to improve liquidity in credit markets.
2
This subsidiary
company is not consolidated with the accounts of the
Bank of England. The BEAPFF ?nances the purchase of
assets using a loan from the Bank of England. This loan is
the only transaction related to the fund that is presented in
the ?nancial statements of the Bank of England. As at 28
February 2011 the loan to the fund totalled approximately
GBP 200 billion.
• Bank of England Special Liquidity Scheme (SLS): The SLS
was introduced in 2008 to provide rapid liquidity assistance
to banks by allowing them to exchange mortgage-backed
and other securities for UK Treasury Bills.
3
Information on
the collateral required under this programme is included in
the bank’s ‘Financial Risk Management’ note.
Swiss National Bank Stabilisation Fund
The Stabilisation Fund manages the illiquid assets taken
over from UBS during 2008. Asset purchases are ?nanced
through a loan from the Swiss National Bank, and the bank
presents both non-consolidated and consolidated ?nancial
statements. The outstanding loan to the fund recorded in the
bank’s non-consolidated ?nancial statements amounted to
CHF 7.6 billion at 31 December 2011. Assets taken over by
the fund primarily included loans and securities, and in some
cases of default the bank took ownership of the related
collateral or underlying assets.
1.2 Gold and foreign currency assets
Gold
Historically, it was essential for central banks to hold gold
because under a ‘gold standard’ the value of a unit of currency
was de?ned in terms of a certain weight of gold and issued
banknotes could be redeemed for gold. Although the gold
standard is no longer in use today, central banks are still,
in aggregate, amongst the world’s largest holders of gold,
even though the amount of gold held varies widely by bank.
Furthermore, signi?cant increases in the price of gold have
created challenges for central banks because of the use of fair
value and the resulting accounting revaluations, as discussed
in section 2.3.
Changes in the quantities of gold held
There is much debate over how much gold a central bank
should hold. Gold in itself is not directly tied to country risk
(although the world market price is quoted in US dollars).
Therefore, if a country’s currency is not actively traded in
currency markets, the safety of gold is often sought instead
of creating speci?c exposure to other world currencies.
However, gold reserves tend to lay untouched in the vaults
of central banks, producing little or no income while incurring
signi?cant custodial costs. Given the large gold holdings of
central banks, any attempt to sell even a small portion could
drive down the world price of gold. It is therefore interesting
to note that the Banque de France disclosed that in 2009
an agreement was renewed for a ?ve-year period between
the Eurosystem
4
, the Swiss National Bank, and the Sveriges
Riksbank (Swedish National Bank), which sets an annual limit
on the amount of gold that can be sold. It is also noteworthy
that in 2009 the IMF set aside approximately 403 metric tons
of gold to sell. A portion of this was earmarked for sales to
central banks at market prices. Of this, 200 metric tons was
sold to the Reserve Bank of India and a further 2 metric tons
was sold to the Bank of Mauritius.
5
2. For more information, see Bank of England’s Asset Purchase Facility. (http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx)
3. For more information, see Bank of England’s Special Liquidity Scheme. (http://www.bankofengland.co.uk/markets/Pages/sls/default.aspx)
4. The Eurosystem refers to the European Central Bank and the 17 national central banks that have adopted the euro.
5. For more information, see the IMF’s Factsheet - Gold in the IMF. (http://www.imf.org/external/np/exr/facts/gold.htm)
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
7 Understanding policy instruments
Price of gold
The price of gold has increased dramatically in recent years,
as seen in Figure 1.6. Based on data published by the World
Gold Council, the price of gold per troy ounce increased from
approximately USD 637 on 1 January 2007 to USD 1,600 on
1 January 2012, an increase of 150%. Most banks surveyed
account for gold at fair value, and ?uctuations in the price
of gold can have a signi?cant effect on the carrying value of
assets and on net income. Consequently, net income usually
includes unrealised gains and encourages the adoption of
?nancial buffers; see section 3.2 for further discussion.
Figure 1.6: Spot gold price in USD
2002 2004 2006 2008 2010 2012
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Source: World Gold Council (http://www.gold.org)
Gold as an asset class
The exposure to ?uctuations in the price of gold depends
on the percentage of total assets made up by gold holdings.
Figure 1.7 shows the number of banks with gold as a
percentage of total assets falling within each range, up to the
highest value noted of 17%. Some of the banks surveyed
had no holdings at all. This may be due to their governments
not legislating that the central bank itself must hold national
gold reserves. Of the 18 banks surveyed, gold holdings made
up an average of 6% of total assets. This ?gure is up from
approximately 5% in 2007. However, these increases are not
always in line with the overall gold price increases. Possible
reasons include the fact that some central banks – e.g. the
Federal Reserve Banks – record gold at a ?xed historical value
rather than at fair value, and the fact that there have been
signi?cant balance sheet expansions during this period.
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
Gold/Total assets
Figure 1.7: Gold as % of total assets
0
1
2
3
4
5
6
15-17% 10-15% 5-10% 0.1-5% No
holdings
4
5 5
2 2
Source: KPMG IFRG Limited, 2012
Foreign currency assets
In addition to gold, central banks generally hold signi?cant
foreign currency-denominated assets, although the portion
of total assets represented by these assets can vary widely
between individual central banks. Figure 1.8 shows the
average percentage of total assets made up by gold and
foreign currency assets. As demonstrated, the ratio has
varied between 48% and 59% since 2007. This ratio can
be affected by various factors, including foreign exchange
rate revaluations against local currencies or, as described in
section 1.1, signi?cant movements in the local currency asset
positions.
The Bank of Canada is one of four banks surveyed with no
gold or foreign currency reserves, and therefore its balance
sheet is sheltered from foreign currency risk. In contrast,
some of the banks surveyed maintained the majority of
their assets in foreign currency and gold; this may be the
case when local currencies are not extensively traded on
international markets. For example, the Bank of Mauritius
held foreign currency assets making up approximately 85%
of its balance sheet, and gold for a further 6% – bringing the
combined total to 91%.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
8 Current trends in central bank ?nancial reporting practices
Gold Foreign currency assets
G
o
l
d
a
n
d
f
o
r
e
i
g
n
c
u
r
r
e
n
c
y
/
T
o
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a
l
a
s
s
e
t
s
Figure 1.8: Average holdings of gold and foreign currency assets
0%
10%
20%
30%
40%
50%
60%
70%
2011 2010 2009 2008 2007
52%
5%
50%
3%
49%
5%
53%
6%
43%
5%
Source: KPMG IFRG Limited, 2012
1.3 Banknotes in circulation
Background
A de?ning characteristic of central banks is their general
monopoly under local laws to issue banknotes in their
respective countries. All of the central banks surveyed
presented their banknotes in circulation as a liability on the
balance sheet.
The table below shows the typical calculation to arrive at the
balance sheet liability for banknotes in circulation.
Opening balance of notes in existence
(+) New banknotes printed and received in the year
(-) Banknotes destroyed during the year
Closing balance of banknotes in existence
(-) Banknotes on hand
Banknotes in circulation liability
Based on the above, banknotes on hand are accounted for as
a reduction of the balance of notes in circulation, on the basis
that the bank does not have an obligation for notes that are
not in circulation.
The following may lead to the accumulation of this balance:
• banknotes in a central bank’s vault or other stock locations
received from the printers and yet to be issued into
circulation;
• banknotes that were in circulation but have been received
back from commercial banks; and
• banknotes removed from general circulation and earmarked
for destruction.
Accordingly, banknotes in circulation are typically presented
on the face of the balance sheet by deducting notes on
hand from notes in existence. When newly printed notes
are received from the printer, their face value is added to the
balance of notes on hand until they are put into circulation.
DR Notes on hand
CR Notes in existence
The production costs of these notes are expensed because
they have been received and are available for circulation.
DR Expenses
CR Accounts payable
When they are issued into circulation – e.g. a commercial
bank has requested physical cash for its deposits – the
notes on hand account is reduced for the face value, thereby
increasing the net balance of notes in circulation.
DR Deposits – commercial banks
CR Notes on hand
Two of the banks surveyed disclosed a different accounting
treatment for newly printed banknotes that have not yet
been put in circulation. In these cases, their face value was
not initially recognised, and the cost of production of these
banknotes was recognised as a separate asset. As a result,
the face value of the banknotes is only added to the liability
and production costs are only expensed when the notes are
issued for the ?rst time.
For example, the Swiss National Bank presented notes on
hand as an asset, and its ?nancial statements disclosed the
accounting treatment as follows: “Freshly printed banknotes
which have not yet been put into circulation are recognised as
assets at acquisition cost and stated under banknote stocks.
Development costs that qualify for recognition as an asset
also fall under this balance sheet item. At the time a banknote
?rst enters into circulation, its cost is recognised as banknote
expenses.”
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9 Understanding policy instruments
39%
30%
32%
34%
36%
N
o
t
e
s
i
n
c
i
r
c
u
l
a
t
i
o
n
/
T
o
t
a
l
a
s
s
e
t
s
Figure 1.9: Average notes in circulation as % of total assets
0
10%
20%
30%
40%
2011 2010 2009 2008 2007
50%
Source: KPMG IFRG Limited, 2012
Trends in volumes of banknotes
The increase in banknotes in circulation is generally expected
to follow such factors as the trend of a country’s GDP and
in?ation. However, this may not always be the case because
of various market conditions. For example, the recent crisis
created an unusual increase in demand in various countries
as cash was withdrawn from commercial banks. Additionally,
emerging economies continue to show increased use of
ATMs, which also increases the demand for banknotes.
Figure 1.9 shows the average ratio for all central banks
of notes in circulation as a percentage of total assets.
Additionally, the distribution of the average ratio over the
5-year period (see Figure 1.10) demonstrates varying ratios on
an individual basis.
Figure 1.10: Distribution of the 5-year average
N
o
t
e
s
i
n
c
i
r
c
u
l
a
t
i
o
n
/
T
o
t
a
l
a
s
s
e
t
s
0%
20%
40%
Standard
deviation Average
60%
80%
100%
Source: KPMG IFRG Limited, 2012
Coins in circulation
Some central banks are responsible for issuing coins as well
as banknotes when legislation grants the coin privilege to the
central bank rather than to the government.
Of the central banks surveyed, eight had the right to issue coins
and therefore include coins issued as a liability – often grouped
with banknotes in circulation for presentation purposes.
However, four banks surveyed did not have the right to issue
coins and consequently recognised their coin holdings as an
asset. For example, the Deutsche Bundesbank disclosed that
“coins are received from the federal mints at their nominal
value for the account of the Federal Government”. Local laws
may stipulate an upper limit on the amount of coins that the
bank may purchase from a government, as excess purchases
could be seen as providing ?nancing to the government.
Demonetised banknotes
A number of factors make it dif?cult to accurately estimate
the amount of demonetised banknotes still in circulation.
This in turn could, over time, accumulate into a signi?cant
overstatement or understatement of banknotes in circulation.
For example, banknotes that are lost or destroyed without
the bank’s knowledge – e.g. through natural disasters – may
overstate the balance sheet liability. Conversely, the liability
may be understated when banknotes that are destroyed
include undetected forged banknotes.
Generally, banknotes are issued in series that are printed
and circulated for a limited period of time. When a new
series is issued, the old series is usually still considered legal
tender, either for a stated period of time or inde?nitely. The
?nancial statements of the central banks surveyed show that
accounting for banknotes from an old series is greatly affected
by whether or not such banknotes have a time limit to their
validity as legal tender, and the likelihood that they would
actually be exchanged for the newer series.
For example, the Bank of Canada included old series notes
in its balance of notes in circulation, and did not remove
them because they remain legal tender. The Bank of Israel,
however, recorded a gain of ILS 220 million in its 2010 ?nancial
statements (about USD 62 million at that time) for the face
value of notes that had passed the legal date for exchange and
were no longer valid for use.
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10 Current trends in central bank ?nancial reporting practices
This issue is also highlighted by the introduction of the
euro and subsequent removal from circulation of national
currency banknotes. For example, the balance sheet of the
Deutsche Bundesbank included a liability for Deutsche mark
notes still in circulation. However, its notes disclosed that in
2004 a portion of the notes were taken off the balance sheet
and recorded as income, because it was deemed highly
unlikely that these would ever be exchanged for euros. The
Banque de France still recognised French franc banknotes
as a miscellaneous liability, instead of notes in circulation,
because the notes were no longer legal tender but could still
be exchanged until 17 February 2012.
11 Understanding policy instruments
Future developments
• We expect domestic lending to continue playing an
important role, although new types of programmes
and interventions may emerge.
• Continued disclosures on these new programmes
will promote transparency and understanding of the
central bank’s role in market interventions.
• Policies for foreign currency assets, gold and
banknotes in circulation may remain consistent, but
their share of central banks’ balance sheets may
continue to vary as domestic currency operations
further develop.
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IFRS
IFRS-based
ECB Accounting
Guideline
Local GAAP or speci?c
legislation
33% (6)
22% (4)
17% (3)
28% (5)
2
Accounting frameworks
and policies
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12 Current trends in central bank ?nancial reporting practices
Key issues & ?ndings
• There was no consistent fnancial reporting
framework in use, and the adopted frameworks
were the signi?cant driver in the diversity in
accounting policies.
• More central banks are adopting IFRS, and banks
often used IFRS as a basis of reporting when
speci?c local legislation allowed them to choose
an appropriate accounting framework.
• The classifcation of fnancial instruments varied
widely with the reporting framework adopted,
but the measurement of these instruments was
mostly consistent across central banks.
• Central bank activities lead to specifc accounting
considerations and challenges, such as the
ownership of BIS shares and the treatment of
foreign exchange gains and losses.
• The income statements contained varying levels
of detail, but in general there appeared to be a
common theme of presenting a simple income
statement, with further disclosures in the notes.
• There was no common presentation for the
cash ?ow statement, and some disclosures
signi?cantly questioned the usefulness of this
statement for central banks.
2.1 Financial reporting frameworks
As IFRS becomes the recognised framework in many
countries, this trend is re?ected in the ?nancial reporting
framework adopted by central banks. Adoption of IFRS by
central banks allows comparison between these unique
institutions. However, due to their special legal status, central
banks may not be required to implement IFRS – even in
jurisdictions that have adopted IFRS as the ?nancial reporting
framework for other types of entities (such as publicly listed
companies).
Figure 2.1: Reporting frameworks
Source: KPMG IFRG Limited, 2012
Of the central banks surveyed, 10 adopted IFRS or a ?nancial
reporting framework that was based on IFRS (‘IFRS-based
framework’). The remaining eight reported under local
GAAP or their own speci?c legislation, which includes the
Eurosystem accounting principles and rules set out in the ECB
Accounting Guideline for central banks of the eurozone.
Of the 10 banks that reported under IFRS or an IFRS-based
framework, four disclosed IFRS as a basis for their own
individual framework, modifying certain requirements to better
re?ect the speci?c needs of their legislative environment. Such
modi?cations are often attributed to the special nature of central
bank activities and the perceived incompatibilities of IFRS with
the pro?t remittance model of central banks. Appendix A lists
the speci?c frameworks used by each central bank.
Main differences between IFRS and the ECB
Accounting Guideline
The ECB Accounting Guideline is a prominent example of a
framework that arises from speci?c central bank legislation,
and is used by all Eurosystem central banks. The table below
summarises major differences between the ECB Accounting
Guideline and IFRS.
Issue
6
IFRS ECB Accounting Guideline
Classi?cation of Requires classi?cation in categories de?ned as Available classi?cation options are similar to IFRS except that
?nancial assets initially designated at fair value through pro?t or loss there are speci?c requirements for illiquid equity shares and
(FVTPL), held-for-trading, available-for-sale, held-to- other equity held as permanent investments.
maturity, and loans and receivables.
Measurement of • Loans and receivables are measured at • Loans are measured at nominal value.
?nancial assets amortised cost.
• Illiquid equity shares and other equity held as permanent
• Unrealised gains and losses on FVTPL and held-for- investments are measured at cost subject to impairment.
trading ?nancial assets are included in pro?t or loss.
Asymmetric treatment whereby:
• Unrealised gains and losses on available-for-
• Unrealised gains are not recognised in proft or loss, but are
sale ?nancial assets are recorded in other
recorded in a liability revaluation account.
comprehensive income, except for foreign
currency differences on monetary assets and
impairment.
• Unrealised losses are included in the proft or loss account
if they exceed previous revaluation gains, thereby reducing
net income.
(This applies to both fair value measurements and foreign
exchange ?uctuations.)
Financial Comprehensive requirements to disclose: Speci?c disclosures are not explicitly identi?ed but harmonised
instrument
• the signifcance of fnancial instruments for an
disclosures of items of common interest to the Eurosystem
disclosures
entity’s ?nancial position and performance.
are recommended. (These disclosures are unde?ned in the
• qualitative and quantitative information
ECB Accounting Guideline.)
on exposure to risks arising from ?nancial
instruments (further discussed in section 5).
Provisions for Provisions are only allowed when the following Provisioning rules are less prescriptive and are determined
liabilities conditions are met: by the speci?c legislation that applies to each member of the
• an obligation exists as a result of a past event;
Eurosystem. General provisions are usually permitted for:
• it is probable that an outfow of resources will be
• foreign currency;
required to settle the obligation; and • interest rates;
• the amount can be reliably estimated. • gold price; and
• credit risk.
Components A complete set of ?nancial statements includes Does not require a cash ?ow statement and statement of
of ?nancial a cash ?ow statement and a statement of comprehensive income.
statements comprehensive income.
6. This comparison is based on information included in the European Central Bank’s April 2012 Monthly Bulletin. (http://www.ecb.int)
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13 Accounting frameworks and policies
The Eurosystem has considerable authority to set its own
accounting rules, and in this respect is similar to those
central banks which have adopted a IFRS-based framework
that is adapted to take into account the unique function of a
central bank.
IFRS modi?cations
Although the introduction of IFRS allows for greater
comparability, a number of central banks have made
modi?cations to IFRS on the basis that the objectives and
structure of their institution differs from those of commercial
banks and therefore modi?ed accounting and disclosures are
appropriate. Generally, these modi?cations are determined by
the individual bank and follow a de?ned legal process.
The four central banks that were classi?ed as using an IFRS-
based framework generally departed from IFRS in respect
of credit risk disclosures, accounting for foreign exchange
and gold, and/or the recording of provisions. These areas are
discussed in greater detail in sections 2.3, 3.2 and 5.2. The
following table summarises the IFRS departures that were
described in the ?nancial statements.
Central Bank Disclosed IFRS departures related to:
Bank of England • Constituent elements of the income statement
• Income and expenses
• Operating segments
• Contingent liabilities and guarantees
• Information on credit risk
• Related parties.
Bank of Chile • Ability to record global or individual provisions based on risk for certain investing operations.
• No statement of comprehensive income, statement of changes in equity or statement of cash ?ows.
Reserve Bank of New
Zealand
• Inventory [banknotes] acquired at no cost or nominal consideration is measured at current
replacement cost instead of the lower of cost and net realisable value.
South African Reserve
Bank
• Realised and unrealised gains and losses on gold and foreign exchange are not included in pro?t or
loss, because they are for the account of the government.
• Gold is valued per section 25 of the South African Reserve Bank Act at the statutory gold price and
is recognised as a ?nancial asset.
• Omissions related to IFRS 7 disclosures, including sensitivity analysis and credit quality.
• Assets and liabilities related to securities lending activities are disclosed but presented on a net basis.
Similarities can be seen between the IFRS departures
noted above and those of the ECB Accounting Guideline,
highlighting the areas of IFRS that are perceived by some
central banks to be dif?cult to apply in the context of central
bank activities, notwithstanding that IFRS is a general
purpose framework.
2.2 Securities and lending
Local and foreign currency assets
A broad range of ?nancial instruments were held by the
central banks surveyed. Some strictly held domestic currency
instruments, while others held a high proportion of foreign
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14 Current trends in central bank ?nancial reporting practices
currency instruments. Accounting for these instruments
varied widely. Accordingly, there was no common practice
for the classi?cation of the instruments across all central
banks. In general, equity securities are classi?ed into
categories measured at fair value, and loans and similar
instruments at amortised cost. The key accounting issues for
these instruments relate mostly to the treatment of gains
and losses when the instruments are revalued – i.e. due to
changes in market values or foreign exchange movements.
This is discussed in section 2.3.
Reverse securities repurchase agreements
The volume of reverse repurchase agreements
7
used by
some central banks has increased in recent years, following
the increase in demand for liquidity in markets. Accounting
for these instruments as balance sheet assets was mostly
consistent, as presented in Figure 2.2, and amortised cost
was the preferred valuation method.
8
In these cases, a central
bank would also not recognise the collateral received.
Figure 2.2: Accounting for reverse repurchase agreements
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
2
4
6
8
10
12
14
12
2
3
1
Value of
collateral
None or
undisclosed
FVTPL Amortised
cost
Source: KPMG IFRG Limited, 2012
As an example, the Reserve Bank of Australia disclosed
speci?c information on collateral, including the amount
of collateral that must be pledged. It also disclosed an
acceptable haircut
9
range of between 2 and 10%, which
increases with the risk pro?le of the securities.
Invariably, the value of collateral accepted is higher than
the cash lent. Further discussion of collateral disclosures is
included in section 6.
Securities repurchase agreements
Central banks may also borrow money from commercial
banks and give collateral in ‘securities repurchase
agreements’. Central banks may enter into these agreements
when there is excess liquidity in the market, typically by
taking a collateralised loan for a short period of time. The
treatment of this type of loan was largely consistent, with
most recognising a liability and not derecognising the assets
pledged. Figure 2.3 summarises the number of central banks
using each treatment.
Figure 2.3: Accounting for repurchase agreements
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
2
4
6
8
10
12
14
16
No balances at
reporting date
Derecognise
assets
Record liability
1
15
2
Source: KPMG IFRG Limited, 2012
2.3 Gold and foreign exchange
Gold
Of the14 banks surveyed that held gold reserves (see section 1.2),
13 held gold bullion or coin either as the sole form of gold holding
or in combination with gold receivables. The Federal Reserve
Banks only reported gold receivables, because they hold gold
certi?cates issued by the Secretary of the US Treasury – these
are backed by gold owned by the Treasury and are valued in the
?nancial statements at a ?xed rate set by law (USD 42 2/9 per ?ne
troy ounce, or about 3% of market value at 31 December 2011).
These 13 banks measured gold on a fair value or fair value-
related basis, although there were some variations in the
method used and the source of the market price. Several
central banks valued their gold holdings using the London
PM gold ?xing, quoted in US dollars, but there was some
diversity in practice. For example, the Reserve Bank of India
7. The term ‘reverse repurchase agreement’ is used throughout this study, and is used interchangeably with ‘collateralised loans’. These are usually loans having short- to medium-term maturities with principal
repayment at the end of the term and provide market liquidity. They are usually secured with marketable securities as collateral.
8. This includes amounts classi?ed as loans and receivables and as held-to-maturity, because they result in the same measurement under IFRS. It also includes amounts recognised at nominal amount plus
accrued interest, because the accounting result is the same.
9. ‘Haircut’ refers to the percentage reduced from the collateral’s fair value, based on the risk associated with the collateral received.
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15 Accounting frameworks and policies
valued its gold at 90% of the daily average price quoted
at London for the month, while the Bulgarian National
Bank disclosed its treatment of gold as follows: “With
regard to the set characteristics of the monetary gold, the
management considers that IFRS does not provide a reliable
base for the reporting of this asset. Therefore, pursuant to
the requirements of IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors, the Bank de?nes the
recognition and valuation of the monetary gold as a ?nancial
asset reported at fair value through pro?t or loss as the most
reliable and appropriate basis for subsequent valuation of this
?nancial asset.”
However, banks used different methods to recognise changes
in fair value.
• fair value through proft and loss (FVTPL)
• fair value through other comprehensive income (FV OCI)
• fair value with changes recorded to liability accounts (FVL).
Figure 2.4 shows the number of banks that elected to use
each method. The most common method for recognising
the changes in fair value was FVTPL, followed by FVL. Many
central banks treated gold valuation adjustments consistently
with foreign currency translation adjustments.
Figure 2.4: Accounting for gold
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
1
2
3
4
5
6
7
8
FVL FV OCI FVTPL
7
4
2
Source: KPMG IFRG Limited, 2012
Treatment of foreign exchange gains and losses
Foreign currency assets and liabilities may make up a
considerable portion of a central bank’s balance sheet, so the
accounting treatment of gains and losses on those instruments
is usually a signi?cant accounting policy for them. Of the
banks surveyed, 11 accounted for gains and losses on foreign
exchange through pro?t or loss – i.e. the income approach
– and this accounting treatment was driven by the fact that
banks reporting under IFRS are required to follow this method.
Under the income approach, banks generally present realised
and unrealised foreign exchange gains and losses in the
income statement. However, if a bank applies IFRS, then the
accounting for foreign exchange translation on non-monetary
items requires the remeasurement to follow the instrument
– i.e. for an available-for-sale asset that is revalued through
other comprehensive income, any change that relates to
changes in foreign exchange rates is also recognised in other
comprehensive income.
The liability approach differed
10
in its application among the
remaining seven banks; however, all were similar in that
primarily, foreign exchange ?uctuations were recorded in
a balance sheet liability account. In some instances, gains
and losses were not treated symmetrically. For example, the
Banque de France (along with the Deutsche Bundesbank
and the European Central Bank) disclosed that unrealised
gains on foreign currency are recorded as liabilities in the
revaluation account, while unrealised losses in excess of
gains are recognised in net income; valuation is performed
on a currency-by-currency basis and different currencies are
not netted against each other. The South African Reserve
Bank treated foreign exchange pro?ts and losses somewhat
similarly because they were “for the account of government
and, consequently, all these pro?ts and losses are transferred
to the [gold and foreign exchange contingency reserve
account]”. This effectively means that the gains and losses
are not to be distributed along with other pro?ts to external
shareholders.
Figure 2.5: Treatment of foreign exchange gains and losses
Income approach
Liability approach
61% (11)
39% (7)
Source: KPMG IFRG Limited, 2012
10. Gains and losses through a liability account. See section 3.2 for a related discussion on reserves.
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16 Current trends in central bank ?nancial reporting practices
2.4 Other ?nancial instrument-related
issues
Accounting for holdings of BIS shares
The Bank for International Settlements (BIS) acts as a bank
for central banks, providing banking services, as well as being
a forum for collaboration. The BIS currently has 60 member
central banks, all of which hold shares in the BIS that give
them representation and voting rights at general meetings.
Of the 18 banks surveyed, 16 had shareholdings in the BIS,
and there was variation in the accounting policies that they
used to measure these shares.
Figure 2.6 shows how the surveyed banks accounted for
these shares. Of the banks reporting the BIS shares at fair
value, three different approaches were noted. As shown in
Figure 2.7, three banks used a discounted net asset value
to determine the fair value; the remaining two used other
methods, including a dividend yield model, because the BIS
shares are subject to a yearly dividend. The discounted net
asset value method discounts the shares’ net asset value by
30%. This takes into account a decision by the International
Court at The Hague relating to a share repurchase by the BIS
in 2001, which has since been used as the basis for setting the
transaction price when new shares are issued. This method
considers that the legal decision has ultimately set the
assigned value if shares were to be traded, because the legal
precedent encourages a purchaser to buy at a price not higher
than that value, while a seller would not sell below that value.
Figure 2.6: Measurement basis of BIS shares
Fair value
Cost
Undisclosed
31% (5)
50% (8)
19% (3)
Source: KPMG IFRG Limited, 2012
Discounted net
asset value
Other fair value
40% (2)
60% (3)
Figure 2.7: Fair value method for BIS shares
Source: KPMG IFRG Limited, 2012
Central bank issuance of debt
A central bank may have the right to issue debt securities,
and of the 18 central banks surveyed, six had actually done
so. The instruments issued primarily consisted of bonds and
promissory notes. In comparison to other instruments used
by central banks, the volume of own debt issued was typically
relatively small, although there were exceptions. For example,
the Central Bank of Chile’s debt securities balance was
greater than that of banknotes and coins in circulation and
represented more than half of its total assets.
For the banks surveyed, there was either no disclosure at all
on the reason for issuing debt, or the disclosure was very
brief. For example, in its accounting policy note, the Bank of
Mauritius states that its savings bonds, bills and notes are
“issued for liquidity management.”
Accounting for impairment of assets
Central banks have traditionally only invested in lower risk
?nancial assets – e.g. very highly-rated money-market
instruments, T-bills, and government bonds. But with the
crisis, they have moved away from this basic policy, and
have therefore taken on more risk by advancing longer-term
loans, expanding the eligibility of collateral, or making outright
purchases of corporate bonds. In addition, many previously
highly-rated instruments have suffered downgrades in credit
quality. Because of these new developments, the impairment
of ?nancial instruments has become more important. Of the
banks surveyed, 11 disclosed an impairment policy.
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17 Accounting frameworks and policies
The European Central Bank held investments under the SMP,
and valued them at amortised cost subject to impairment.
Annual impairment tests were performed to estimate the
recoverable amount at the 2011 year end, and no impairment
losses were recorded. Notably, the bank maintained a
provision for foreign exchange rate, interest rate, credit and
gold price risks, and at 31 December 2011 it transferred an
amount of EUR 1.2 billion to the provision out of income
arising from securities purchased under the SMP and from
euro banknotes in circulation. Thus, the bank may be able to
provide for possible future losses associated with the SMP
portfolio, even though none have been incurred at year end.
This re?ects a fundamental concept in the bank’s model for
recording provisions as a ?nancial buffer (as discussed in
section 3), contrasting with a pure incurred-loss model that is
required under IFRS.
2.5 Analysis of income and expenses
Traditionally, the analysis of a central bank’s ?nancial
statements has focused on the balance sheet rather than
11. For the purposes of this section, we have ignored the statement of other comprehensive income for central banks that
report under IFRS.
the income statement because, unlike a commercial bank,
a central bank’s main objective is not to generate pro?ts.
Nonetheless, the income statement is a useful tool, because
the transparency of signi?cant items that affect net income
can help readers to understand a central bank’s activities and
its use of resources.
Income statement presentation
11
The structure of the income statement varied amongst
central banks, with each style of presentation emphasising
different measures of performance. For the banks surveyed,
income statements were generally presented in one of the
following forms:
• Traditional: total revenues less total expenses to arrive
at net pro?t.
• Net: income and expenses of a similar nature are grouped
and presented on a gross basis, with several ‘net’ subtotals.
• Hybrid: a mixture of the traditional and net presentation,
usually with a particular focus on the net position from
interest.
Traditional Net Hybrid
Revenues
Interest revenue
FX gains
Other, etc.
Total revenues
Expenses
line 1
line 2
line 3
Total expenses
Net pro?t
Interest revenue
Interest expense
Net interest income
Realised gains/losses
FX gains/losses
Net result of ?nancial operations
Other income
Expense 1
Expense 2
Net pro?t
Interest revenue
Interest expense
Net interest income
Other revenues
Expenses
line 1
line 2
line 3
Total expenses
Net pro?t
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18 Current trends in central bank ?nancial reporting practices
Among the 18 banks surveyed, the net method was the
most commonly used (see Figure 2.8). The European
Central Bank, Deustche Bundesbank, and Banque de France
have adopted this presentation method because the ECB
Accounting Guideline sets out standard formats for the
balance sheet and pro?t or loss account. The advantages
of a net presentation are an increased focus on each type
of activity and the ability to assess the impact of each
activity on the bank’s results – e.g. the result from lending
and borrowing (net interest), ?nancial transactions, or
foreign exchange operations. The hybrid method places a
similar focus on net interest, while maintaining a traditional
presentation for other streams of income and expenses.
Figure 2.8: Income statement presentation
0
1
2
3
4
5
6
7
8
9
Hybrid Net Traditional
Presentation style
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
4
6
8
Source: KPMG IFRG Limited, 2012
Segment information
There was no indication that any of the surveyed central banks
classi?ed any of their activities into operating segments (as
de?ned by IFRS 8 Operating Segments
12
). None reported
segment information, although the Bank of England and the
Reserve Bank of India had unique presentation approaches
as discussed below. The split of activities between domestic
currency operations and foreign currency operations was
often an important consideration. Four of the surveyed banks
segregated foreign and domestic assets on the balance sheet.
For example, the Bank of Mauritius had a separate heading
and subtotal of foreign assets presented ?rst on the balance
sheet, followed by domestic assets. This is consistent with the
fact that the majority of its balance sheet was held in foreign
currency.
As for segmental reporting that serves a similar purpose to
IFRS 8, The Bank of England presented two separate sets of
?nancial statements – one for the Banking Department and
one for the Issue Department. In effect, this presentation
earmarks the speci?c assets that it holds against the liability
of banknotes in circulation (thereby giving an indication of
seigniorage income), and groups the remaining operations
under the Banking Department. Notably, this presentation
was adopted to satisfy statutory requirements dating back
to 1928.
The Reserve Bank of India had a similar segregation, although
it presented one set of ?nancial statements and only broke
down the balance sheet between the two functions.
In both cases, the liabilities on the issue department’s balance
sheet consisted exclusively of banknotes in circulation. The
assets were slightly more diverse, and consisted of various
local and foreign currency assets – including gold, government
securities and other securities.
Income line items
On average, the surveyed central banks displayed ?ve
income line items, ranging from one (two banks) to 19 (one
bank). Nearly every bank presented a speci?c line for interest
revenue, and occasionally this was broken down into more
detailed levels of interest revenue, such as interest on foreign
assets and interest on domestic assets. The focus on interest
revenue is not surprising given the importance of interest-
bearing assets for central banks, since they comprise the
majority of their assets held.
Given the signi?cance of foreign currency assets to many
central banks, foreign exchange gains and losses are also
important, with many banks reporting them as a separate
line item. Dividend income was also commonly found on
the income statement; however, it was often relatively
immaterial, because central banks generally do not hold
signi?cant volumes of equity instruments. Dividends from the
BIS shares were often the only source of dividend income.
Expense line items
Of the 18 central banks surveyed, the average number of
expense line items disclosed was seven and ranged from one
(one bank) to 17 (one bank). Similar to interest revenue,
interest expense is important to most central banks, with
16 of the 18 banks surveyed presenting interest expense as
a separate line.
Producing and issuing banknotes is a primary function of
central banks, and these costs are also commonly presented.
Eight of the surveyed banks presented this as a speci?c line
on the face of the income statement.
The majority of central banks surveyed also presented
operational and general and administrative expenses such
as staff costs and depreciation in varying levels of detail.
However, the presentation was generally similar to that for
typical pro?t-oriented entities.
12. IFRS 8 is only applicable for entities with debt or equity instruments in the public markets or that are in the process of issuing such
instruments.
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19 Accounting frameworks and policies
Supporting income statement disclosures
Additional information was often disclosed in the notes to the
?nancial statements, to provide more background information
on central bank operations – particularly for less detailed
income statements.
The notes were sometimes used to provide a different
perspective of the income statement items presented on
the face of the statement. For example, the revenues and
expenses of two central banks were categorised by nature
on the face of the income statement but were categorised by
function in the notes. Functional presentation helps the reader
to assess how resources are used in the various functions of
the central bank, such as monetary policy, ?nancial system
supervision, currency management and operations, and
payment and settlement services.
The Bank of England presented only one line – pro?t before
tax – in the income statement of the Banking Department (not
including tax expense), but the notes included a more detailed
breakdown of income and expenses by type. This resembled
the traditional breakdown, with revenues listed by type
followed by expenses.
The most common trend noted was the tendency to
include a moderate level of detail on the face of the income
statement, and supplemental information in the notes. The
notes often included a narrative description of the sources
(by type of instrument) of revenue and expenses and in
some cases analysis of the changes in the balance.
2.6 Presentation of cash ?ow statements
The presentation of a cash ?ow statement varied among
the banks surveyed, depending largely on the reporting
framework adopted. Figure 2.9 shows the percentage of
central banks surveyed that did not present a cash ?ow
statement and, for those that did, the split between use of
the direct method (i.e. presenting gross cash receipts and
gross cash payments) and the indirect method (i.e. starting
with net income and making adjustments for non-cash
items). IFRS requires a cash ?ow statement, and all banks
reporting under IFRS included the statement. Those that did
not present a cash ?ow statement commonly gave one of
two explanations. The ?rst was that the statement provides
no additional information beyond what is already presented
on the face of the ?nancial statements. The second was that,
given the unique role of central banks as the ultimate source
of domestic liquidity, a cash ?ow statement is not meaningful.
Direct method
Indirect method
None
33% (6)
11% (2)
56% (10)
Figure 2.9: Presentation of cash ?ow statements
Source: KPMG IFRG Limited, 2012
Although IFRS-based, the Central Bank of Chile does not
present a cash ?ow statement, which is a stated departure
from IFRS. However, the bank included a ‘statement of
variation in monetary base and international reserves’ in the
notes to the ?nancial statements. Rather than showing the
traditional operating, investing and ?nancing movements
of cash and cash equivalents in the cash ?ow statement,
this statement showed changes in the monetary base and
international reserve assets grouped by increases and
decreases related to these accounts.
Future developments
• As more countries adopt IFRS, the number of central
banks reporting under IFRS or IFRS-based frameworks
is likely to increase.
• The new fnancial instruments standard (IFRS 9, which is
expected to be applicable in 2015) will be signi?cant for
central banks, because most balance sheet items fall
within the scope of these requirements.
• The International Accounting Standards Board
is currently deliberating a new expected loss
impairment model, which is more focused on
forward looking information than the current
requirements and may impact central banks’
assessments.
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20 Current trends in central bank ?nancial reporting practices
• As more countries adopt IFRS, the number of central
banks reporting under IFRS or IFRS-based frameworks
is likely to increase.
• The new fnancial instruments standard (IFRS 9, which is
expected to be applicable in 2015) will be signi?cant for
central banks, because most balance sheet items fall
within the scope of these requirements.
• The International Accounting Standards Board
is currently deliberating a new expected loss
impairment model, which is more focused on
forward looking information than the current
requirements and may impact central banks’
assessments.
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21 Accounting frameworks and policies
3
Capital
management
Key issues & ?ndings
• Central bank capital targets remain largely
unde?ned.
• There is no recognised guidance or set practice
for calculating the appropriate levels of capital for
a central bank.
• When not specifcally prohibited by the fnancial
reporting framework, liability accounts were often
used to record provisions as an alternative to
using equity reserves.
• Specifc legislative requirements also affected
the various methods for calculating reserves and
?nancial buffers.
3.1 Capital
Capital management for central banks can be challenging.
Laws governing their operations often require annual pro?ts
to be remitted to the government, limiting the amount of
capital that can be accumulated as retained earnings. This
has been particularly challenging for central banks that have
moved to IFRS and that have suffered ?uctuations in pro?ts
due to certain unrealised gains and losses being taken into
income. Central banks generally manage their capital by
using discretionary and non-discretionary reserves (equity
capital) and provisions and revaluation accounts (liabilities)
to offset unrealised gains and losses, and to cover risks that
may crystallise in the future – thereby avoiding the potential
for negative equity. Central banks’ capital structures are often
directed by speci?c, and possibly unique, legislation in each
country; however, on closer inspection common patterns
emerge, as the following results show.
Overall capital levels
Capital can generally be broken down into three categories:
stated capital
13
, retained earnings
14
and reserves. In
general, stated capital is set by the central bank law and
is established on creation. Retained earnings accumulate
when a bank is not required to remit all of its earnings to
shareholders, and therefore results in a build-up of capital.
Reserves can often be used to manage the effect of yearly
variations in pro?t or loss and net earnings to be remitted to
the government as a shareholder.
13. This includes statutory reserves, as these types of reserves are usually ?xed by legislation.
14. This includes dividends (declared but not yet paid), as some central banks present them as a separate line in the ?nancial statements.
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22 Current trends in central bank ?nancial reporting practices
Stated capital
Non-discretionary
reserves
Discretionary
reserves
Retained earnings
21%
48%
21%
10%
Figure 3.1: Average distribution of capital
Source: KPMG IFRG Limited, 2012
The average breakdown of capital for the banks surveyed
is shown in Figure 3.1.
15
The actual breakdown for individual
banks varied signi?cantly due primarily to differences in
statutory requirements and capital management strategies.
However, some trends emerged when looking across the
population surveyed.
The breakdown in Figure 3.1 highlights the signi?cance
of reserves in relation to total capital.
16
Reserves may be
seen as tools to manage the distributable pro?t and the
amount remitted to the government. By allocating amounts
to reserves, either before or after arriving at net income (as
described in section 3.2), banks manage the timing of their
remittances to shareholders, so that accounting results do not
con?ict with the overall remittance model.
15. Banks with negative capital were excluded from this analysis.
16. For this analysis, we have treated reserves, provisions, and revaluation accounts jointly as reserves.
17. See footnote 16 is respect of reserves included in capital.
18. For more information, see BIS’s international regulatory framework for banks. (http:// www.bis.org/bcbs/basel3.htm)
Minimum capital levels
Figure 3.2 shows the ratio of capital
17
to total assets.The bars
represent the number of banks whose ratio falls into each
range. The ‘10% 5% to 10% 0% to 5%
The purpose of this study is to give an overview of the key financial reporting practices of central banks. With no common framework in use by all central banks, it is often difficult to determine whether the figures and other information reported are in fact comparable, and where any differences may lie
FINANCIAL SERVICES
Current trends
in central bank
?nancial reporting
practices
October 2012
kpmg.com
Contents
Foreword 1
About this study 2
Acknowledgements 2
Executive summary 3
1 Understanding policy instruments 4
1.1 Lending in domestic currency
and market interventions 5
1.2 Gold and foreign currency assets 7
1.3 Banknotes in circulation 9
2 Accounting frameworks and policies 12
2.1 Financial reporting frameworks 12
2.2 Securities and lending 14
2.3 Gold and foreign exchange 15
2.4 Other ?nancial instrument-related issues 17
2.5 Analysis of income and expenses 18
2.6 Presentation of cash ?ow statements 20
3 Capital management 22
3.1 Capital 22
3.2 Reserves 24
3.3 Pro?t remittance and treatment
of losses 25
4 Government interactions 26
4.1 Transactions with government 26
4.2 Other relationships 29
5 Financial instrument disclosures 30
5.1 Fair value disclosures 31
5.2 Credit risk 31
5.3 Liquidity risk 32
5.4 Market risk 32
6 Other risk management disclosures 34
6.1 Collateral 34
6.2 Contingencies 36
6.3 Other ?duciary functions 36
Appendix A 38
Glossary 39
Notes 40
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
A
Foreword
Open a newspaper these days and it seems impossible to avoid news
about the global ?nancial crisis, the eurozone debt crisis, the stalling
recovery of the US economy and the slowdown of growth in emerging
markets. Continuing pressures from various sources, following the
collapse of Lehman Brothers in 2008, have increased the fragility
of economies worldwide. In setting and executing monetary policy,
central banks have been forced to extend their role and intervene in
markets to levels never seen before.
lthough these activities re?ect
macroeconomic factors of a far
broader scope than simply the
central bank itself as an institution, the
?nancial statements of a central bank
do shed some light on the impact of
policy instruments and the risks related
to the various measures implemented.
A ?nancial reporting framework that
portrays the central bank’s ?nancial
position and results may enable
stakeholders to assess the state of local
conditions in more concrete terms.
Against the backdrop of these
developments and our 2009 study
Central bank accountability and
transparency, we now consider it
worthwhile to review again the current
status of ?nancial reporting practices
amongst central banks. Central
banks inevitably face a challenge of
comparability, given the uniqueness of
each institution and of the environment
in which they operate. The continued
move towards worldwide adoption
of IFRS has in?uenced the selection
of ?nancial reporting frameworks by
central banks and the extent to which
they comply with IFRS, yet challenges
still exist given the unique operations of
central banks.
Whilst this publication is primarily
written for central bankers in ?nancial
reporting roles, we hope that the
analysis of our ?ndings will also be
of interest to other stakeholders and
provoke informed discussion on some
of the key issues faced by central
banks today and how these can be
re?ected in a central bank’s ?nancial
reporting practices.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
1 Foreword
Jeremy Anderson
Global Head of Financial Services
KPMG in the UK
Ricardo Anhesini
Chair of the Central Bank Network
Advisory Group
KPMG in Brazil
About this study
The purpose of this study is to give an overview of the key ?nancial reporting
practices of central banks. With no common framework in use by all central banks,
it is often dif?cult to determine whether the ?gures and other information reported
are in fact comparable, and where any differences may lie. We aim to identify the
common themes where variety is found in practice, and to highlight some ‘outliers’
which are of particular interest. We also aim to provide industry context for our
results to help shed light on their signi?cance.
Our study is based solely on the ?nancial statements
of the central banks included in our population and
observations are made to the extent that information
was included in those ?nancial statements. We did not
take into account information that was available from
other sources – e.g. from other parts of the annual
report, the central bank law, or from other documents
on a bank’s website – as doing so goes beyond the
requirements of ?nancial reporting frameworks.
Our study is based on a population of 18 central banks,
selected in accordance with various criteria – these
included the ?nancial reporting framework used,
geographical region, whether an English language
version of the statements was available, and whether
recent ?nancial statements were already available at the
time we initiated our research; for most of the central
banks, the ?nancial statements for years ending in the
calendar year 2011 were available, but in some cases
we used 2010. The complete list of our population is
included in Appendix A.
Our study did not benchmark reporting practices against
any one speci?c framework and assess compliance. It
instead provides an overview of current industry practice
based on the various frameworks used by the central
banks included in our population. Inevitably, repeated
reference is made to widely-used frameworks, such
as IFRS or the ECB Accounting Guideline, but this is
simply to contrast the differences in standards and
practices against a basis that most readers can relate
to, and our goal is not to conclude on the relevance or
appropriateness of such frameworks.
Acknowledgements
We would like to acknowledge the principal authors of
this publication:
Michelle Finnegan
KPMG in Canada
David Schickner
KPMG in Germany
Richard Smith
KPMG International
Standards Group
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2 Current trends in central bank ?nancial reporting practices
We would also like to thank the various reviewers,
including Maria Lee, Julie Santoro, Sylvia Smith,
Chris Spall and Jim Tang of the KPMG International
Standards Group (part of KPMG IFRG Limited), and
the members of KPMG’s Central Bank Network
Advisory Group listed on the back cover of this
publication.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
3 Executive summary
Executive summary
This study looks at six areas in central bank ?nancial reporting:
policy instruments and how they have changed during the ?nancial
crisis; accounting frameworks and policies; capital management;
government interactions; ?nancial risk disclosures; and other
disclosures relating to risk management.
As the ?nancial crisis has evolved, central banks have
become more active in their local economies. They have
implemented new policy instruments and expanded various
programmes. Our study found that, although the ?nancial
statements included varying degrees of disclosures on these
types of instruments, most central banks with signi?cant
market interventions provided key details. These signi?cant
movements and balance sheet expansions can however
impact the historical ratios of the balance sheet with respect
to central banks’ other key instruments, such as gold and
foreign currency assets. Despite this new focus, issuing
banknotes remains a key function, and represents the most
signi?cant liability on the balance sheet.
However, identifying these various new measures or policy
instruments is not always straightforward, as there is no
consistent ?nancial reporting framework used across all
central banks. IFRS as a reporting framework is increasingly
being used, but national legislation in certain jurisdictions still
permits central banks to select their accounting framework.
Accordingly, some central banks select IFRS as a starting
point and modify certain requirements given their speci?c and
unique function. Even with these modi?cations, and with the
use of various other frameworks, accounting policies for the
signi?cant assets and liabilities are largely consistent, and fair
value measurements are quite common.
Moreover, central bank capital remains an unde?ned
concept, and no practical guidance exists for calculating
appropriate levels of capital. Because of this, there was a clear
correlation between the accounting framework in use, the
pro?t remittance model, and accounting for reserves. Where
?exibility exists in the accounting framework, central banks
will often use liability accounts to provide for reserves with
respect to ?nancial instrument revaluations and other general
risks. However, central banks whose accounting frameworks
have tighter rules over the recognition of liabilities will use
equity allocations.
Given the relationship that central banks have with their
government, and the expectation that central bank pro?ts
are in most cases distributed to the government, central
banks often included disclosures about the relationship and
transactions with the government. In very limited cases,
central banks actually lend to their government, but the terms
of these agreements were clearly disclosed. Although not
common, some central banks have external shareholders, but
they generally have appropriate mechanisms to limit external
in?uence on the management of the bank. These often
include strict dividend policies and restrictions on external
shareholder involvement in determining or participating on the
management board.
As expected, the extent of ?nancial instrument disclosures
was mainly driven by the relevant ?nancial reporting
framework. Fair value disclosures varied, but most had
information available throughout the ?nancial statements.
In addition to disclosures about speci?c risks, as required
by IFRS, several central banks also disclosed information on
value-at-risk, which is often a key measure for commercial
banks. With increased collateralised lending, disclosures on
collateral were usually incorporated. However, the extent of
these disclosures was usually correlated to the amount of
risk disclosures on ?nancial instruments. Lastly, in addition to
monetary policy, central banks often perform other ?duciary
functions and they often disclosed risks arising from these
activities, including any potential contingencies.
1
Understanding policy
instruments
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
0
10
20
30
40
50
60
70
48%
49%
60%
63%
2011 2010 2009 2008
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
4 Current trends in central bank ?nancial reporting practices
Key issues & ?ndings
• As the fnancial crisis evolves, the role of central
banks is expanding and domestic lending is taking
on new forms.
• Most central banks that expanded their activities
during the crisis included disclosures on these
expanded roles.
• Gold can be an important asset and accounting for
its change in value has certain challenges.
• Central banks often manage their country’s
foreign currency reserves, and these represented
a signi?cant asset.
• Issuing banknotes remains a key function
and gives rise to the most signi?cant liability.
Accounting for this liability is largely consistent.
The past ?ve years have seen tough economic times for
?nancial markets, and in many cases central banks have
stepped in with a variety of unconventional measures in order
to provide stability and liquidity to the market.
These market interventions play an important role in a central
bank’s ?nancial position as they have led to a signi?cant
expansion of central bank balance sheets. Figure 1.1 shows
the average percentage change in total assets since 2008,
using 2007 as a baseline. It indicates that there was a
signi?cant increase in total assets in 2008 when compared
with 2007. This is consistent with the fact that 2008 marks
the start of the sub-prime crisis and central banks’ ?rst
unconventional responses to that crisis. There was also a
signi?cant increase in 2010 and is consistent with the onset of
the European debt crisis, which continued to affect 2011.
Figure 1.1: Average increase in total assets
Source: KPMG IFRG Limited, 2012
Figures 1.2 and 1.3 provide examples of how the level and
timing of interventions by central banks varied depending
on issues faced in local markets.
1
Discussion of the various
measures adopted and examples of these are in section 1.1.
Figure 1.2: Change in total assets – Non-Europe
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
2008 2009 2010 2011
Bank of Canada
46%
33%
24%
144%
14%
25%
165%
19%
219%
36%
145%
Bank of Russia Federal Reserve Banks
0%
50%
100%
150%
200%
250%
Source: KPMG IFRG Limited, 2012
Figure 1.3: Change in total assets – Europe
C
h
a
n
g
e
a
s
a
%
o
f
2
0
0
7
2008 2009 2010 2011
Banque de France
53%
40%
34%
22%
39%
73%
63%
113%
173%
27%
69%
Deutsche Bundesbank Swiss National Bank
0
50
100
150
200
Source: KPMG IFRG Limited, 2012
1.1 Lending in domestic currency and
market interventions
To increase liquidity, a number of central banks have been
making greater use of reverse repurchase agreements and
other forms of collateralised lending in their domestic markets.
Figure 1.4 shows the percentage of total assets represented by
lending in domestic currency for the past ?ve years.
A dramatic spike in domestic lending can be seen for these
banks. This increase speci?cally appears in 2008 and 2009 and is
consistent with the fact that some central banks used domestic
lending as a tool to increase market liquidity at the peak of the
sub-prime crisis.
Figure 1.4: Domestic lending – Non-Europe
1
Bank of Canada
0%
10%
20%
30%
40%
50%
60%
70%
Bank of Russia
Federal Reserve Banks
2011 2010 2009 2008 2007
D
o
m
e
s
t
i
c
l
e
n
d
i
n
g
a
s
%
o
f
t
o
t
a
l
a
s
s
e
t
s
Source: KPMG IFRG Limited, 2012
On the other hand, Figure 1.5 shows a gradual decline
in domestic lending for Banque de France, Deutsche
Bundesbank and the Swiss National Bank. However, only
looking at domestic lending does not re?ect the fact that
liquidity provision measures have taken on new forms.
1. These central banks were not selected as a representative sample of the population, but only to demonstrate a trend noted amongst
some banks.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member ?rms of the KPMG network of independent ?rms are af?liated with KPMG International. KPMG International provides no client services. All rights reserved.
5 Understanding policy instruments Understanding policy instruments
For example, the Eurosystem introduced bond buying
programmes (discussed below) that involve central banks
directly buying assets in exchange for cash. This gives the
impression that liquidity is no longer being provided because
the volume of domestic lending decreases. However, the
difference is in the fact that Eurosystem central banks now
carry the risk of the purchased assets rather than the risk of
the loans made to the commercial banks.
Figure 1.5: Domestic lending – Europe
1
0%
10%
20%
30%
40%
50%
60%
2011 2010 2009 2008 2007
D
o
m
e
s
t
i
c
l
e
n
d
i
n
g
a
s
%
o
f
t
o
t
a
l
a
s
s
e
t
s
Deutsche Bundesbank
Banque de France
Swiss National Bank
Source: KPMG IFRG Limited, 2012
Speci?c examples of crisis intervention disclosures
With a few exceptions, there were no explicit statements on
crisis responses taken due to market conditions. The Bank
of England and the Central Bank of Kenya disclosed some
information on market support and its impact on ?nancial
reporting. For example, the Bank of England stated that “In
exceptional circumstances, as part of its central banking
functions, the Bank may act as ‘lender of last resort’ to
?nancial institutions in dif?culty in order to prevent a loss
of con?dence spreading through the ?nancial system as a
whole. In some cases, con?dence can best be sustained if the
Bank’s support is disclosed only when conditions giving rise to
potentially systemic disturbance have improved. Accordingly,
although the ?nancial effects of such operations will be
included in the Banking Department’s ?nancial statements
in the year in which they occur, these ?nancial statements
may not explicitly identify the existence of such support.” In
addition, other noteworthy disclosures are discussed below.
Bond buying programmes of the Eurosystem
The Securities Markets Programme (SMP) was introduced
by the Eurosystem as a way to intervene in public and private
debt securities markets in the euro area to stabilise the
markets and improve liquidity conditions when certain areas
of the euro debt securities market were malfunctioning.
The covered bond programmes were intended to ease
funding conditions of credit institutions, and encourage and
expand lending to customers. For all three programmes, the
European Central Bank disclosed the intended purpose of the
programme at a high level, with a speci?c reference to the
press release providing the complete details. Additionally, it
disclosed that it holds debt securities issued by the Hellenic
Republic, and discussed the impact of the private sector
involvement initiative announced in 2011. This initiative
was considered to be a voluntary restructuring of private
sector debt, and as such, the European Central Bank did not
expect any resulting changes to the contractual cash ?ows
associated with their holdings. Consequently, it did not record
any impairment losses on these debt securities.
As a result of these programmes, national central banks are
exposed to the risk of loss based on the mechanisms that
exist within the Eurosystem. To that effect, the Deutsche
Bundesbank stated, in relation to the SMP, that “all risks
from these operations, provided they materialise, are shared
among the Eurosystem national central banks in proportion to
the prevailing ECB capital key shares.”
Federal Reserve Banks fnancial stability activities
The Federal Reserve Banks provided signi?cant disclosures
in the ‘Financial Stability Activities’ note, which included ?ve
pages of detailed explanations. Activities disclosed included
the following two signi?cant interventions.
• Large-scale asset purchase programmes and reinvestment
of principal payments: Since 2009, the Federal Reserve
Banks have purchased securities worth approximately USD
1 trillion in a series of acquisitions intended to help improve
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6 Current trends in central bank ?nancial reporting practices
conditions in private credit markets. These investments are
held under reverse repurchase agreements. An additional
USD 134 billion of assets were sold under repurchase
agreements. In addition, the Federal Reserve Bank of New
York was authorized to purchase up to USD 175 billion in ?xed
rate non-callable government-sponsored enterprise debt
securities and USD 1.25 trillion in ?xed-rate federal agency
and government-sponsored enterprise mortgage-backed
securities. The purchases were completed in March 2010.
• Support for speci?c institutions: Several variable interest
entities (VIEs) used loans to buy assets of the Bear Stearns
Companies, Inc. (Bear Stearns) and American International
Group, Inc. (AIG). These assets are consolidated in the
balance sheet of the Federal Reserve Banks because the
bank retains an economic interest in the VIEs.
Bank of England interventions
The Bank of England intervened in its local market, and
provided the following disclosures on programmes that were
new in previous years.
• Bank of England Asset Purchase Facility Fund (BEAPFF): In
2009, it established the BEAPFF to buy high-quality assets
to improve liquidity in credit markets.
2
This subsidiary
company is not consolidated with the accounts of the
Bank of England. The BEAPFF ?nances the purchase of
assets using a loan from the Bank of England. This loan is
the only transaction related to the fund that is presented in
the ?nancial statements of the Bank of England. As at 28
February 2011 the loan to the fund totalled approximately
GBP 200 billion.
• Bank of England Special Liquidity Scheme (SLS): The SLS
was introduced in 2008 to provide rapid liquidity assistance
to banks by allowing them to exchange mortgage-backed
and other securities for UK Treasury Bills.
3
Information on
the collateral required under this programme is included in
the bank’s ‘Financial Risk Management’ note.
Swiss National Bank Stabilisation Fund
The Stabilisation Fund manages the illiquid assets taken
over from UBS during 2008. Asset purchases are ?nanced
through a loan from the Swiss National Bank, and the bank
presents both non-consolidated and consolidated ?nancial
statements. The outstanding loan to the fund recorded in the
bank’s non-consolidated ?nancial statements amounted to
CHF 7.6 billion at 31 December 2011. Assets taken over by
the fund primarily included loans and securities, and in some
cases of default the bank took ownership of the related
collateral or underlying assets.
1.2 Gold and foreign currency assets
Gold
Historically, it was essential for central banks to hold gold
because under a ‘gold standard’ the value of a unit of currency
was de?ned in terms of a certain weight of gold and issued
banknotes could be redeemed for gold. Although the gold
standard is no longer in use today, central banks are still,
in aggregate, amongst the world’s largest holders of gold,
even though the amount of gold held varies widely by bank.
Furthermore, signi?cant increases in the price of gold have
created challenges for central banks because of the use of fair
value and the resulting accounting revaluations, as discussed
in section 2.3.
Changes in the quantities of gold held
There is much debate over how much gold a central bank
should hold. Gold in itself is not directly tied to country risk
(although the world market price is quoted in US dollars).
Therefore, if a country’s currency is not actively traded in
currency markets, the safety of gold is often sought instead
of creating speci?c exposure to other world currencies.
However, gold reserves tend to lay untouched in the vaults
of central banks, producing little or no income while incurring
signi?cant custodial costs. Given the large gold holdings of
central banks, any attempt to sell even a small portion could
drive down the world price of gold. It is therefore interesting
to note that the Banque de France disclosed that in 2009
an agreement was renewed for a ?ve-year period between
the Eurosystem
4
, the Swiss National Bank, and the Sveriges
Riksbank (Swedish National Bank), which sets an annual limit
on the amount of gold that can be sold. It is also noteworthy
that in 2009 the IMF set aside approximately 403 metric tons
of gold to sell. A portion of this was earmarked for sales to
central banks at market prices. Of this, 200 metric tons was
sold to the Reserve Bank of India and a further 2 metric tons
was sold to the Bank of Mauritius.
5
2. For more information, see Bank of England’s Asset Purchase Facility. (http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx)
3. For more information, see Bank of England’s Special Liquidity Scheme. (http://www.bankofengland.co.uk/markets/Pages/sls/default.aspx)
4. The Eurosystem refers to the European Central Bank and the 17 national central banks that have adopted the euro.
5. For more information, see the IMF’s Factsheet - Gold in the IMF. (http://www.imf.org/external/np/exr/facts/gold.htm)
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7 Understanding policy instruments
Price of gold
The price of gold has increased dramatically in recent years,
as seen in Figure 1.6. Based on data published by the World
Gold Council, the price of gold per troy ounce increased from
approximately USD 637 on 1 January 2007 to USD 1,600 on
1 January 2012, an increase of 150%. Most banks surveyed
account for gold at fair value, and ?uctuations in the price
of gold can have a signi?cant effect on the carrying value of
assets and on net income. Consequently, net income usually
includes unrealised gains and encourages the adoption of
?nancial buffers; see section 3.2 for further discussion.
Figure 1.6: Spot gold price in USD
2002 2004 2006 2008 2010 2012
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Source: World Gold Council (http://www.gold.org)
Gold as an asset class
The exposure to ?uctuations in the price of gold depends
on the percentage of total assets made up by gold holdings.
Figure 1.7 shows the number of banks with gold as a
percentage of total assets falling within each range, up to the
highest value noted of 17%. Some of the banks surveyed
had no holdings at all. This may be due to their governments
not legislating that the central bank itself must hold national
gold reserves. Of the 18 banks surveyed, gold holdings made
up an average of 6% of total assets. This ?gure is up from
approximately 5% in 2007. However, these increases are not
always in line with the overall gold price increases. Possible
reasons include the fact that some central banks – e.g. the
Federal Reserve Banks – record gold at a ?xed historical value
rather than at fair value, and the fact that there have been
signi?cant balance sheet expansions during this period.
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
Gold/Total assets
Figure 1.7: Gold as % of total assets
0
1
2
3
4
5
6
15-17% 10-15% 5-10% 0.1-5% No
holdings
4
5 5
2 2
Source: KPMG IFRG Limited, 2012
Foreign currency assets
In addition to gold, central banks generally hold signi?cant
foreign currency-denominated assets, although the portion
of total assets represented by these assets can vary widely
between individual central banks. Figure 1.8 shows the
average percentage of total assets made up by gold and
foreign currency assets. As demonstrated, the ratio has
varied between 48% and 59% since 2007. This ratio can
be affected by various factors, including foreign exchange
rate revaluations against local currencies or, as described in
section 1.1, signi?cant movements in the local currency asset
positions.
The Bank of Canada is one of four banks surveyed with no
gold or foreign currency reserves, and therefore its balance
sheet is sheltered from foreign currency risk. In contrast,
some of the banks surveyed maintained the majority of
their assets in foreign currency and gold; this may be the
case when local currencies are not extensively traded on
international markets. For example, the Bank of Mauritius
held foreign currency assets making up approximately 85%
of its balance sheet, and gold for a further 6% – bringing the
combined total to 91%.
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8 Current trends in central bank ?nancial reporting practices
Gold Foreign currency assets
G
o
l
d
a
n
d
f
o
r
e
i
g
n
c
u
r
r
e
n
c
y
/
T
o
t
a
l
a
s
s
e
t
s
Figure 1.8: Average holdings of gold and foreign currency assets
0%
10%
20%
30%
40%
50%
60%
70%
2011 2010 2009 2008 2007
52%
5%
50%
3%
49%
5%
53%
6%
43%
5%
Source: KPMG IFRG Limited, 2012
1.3 Banknotes in circulation
Background
A de?ning characteristic of central banks is their general
monopoly under local laws to issue banknotes in their
respective countries. All of the central banks surveyed
presented their banknotes in circulation as a liability on the
balance sheet.
The table below shows the typical calculation to arrive at the
balance sheet liability for banknotes in circulation.
Opening balance of notes in existence
(+) New banknotes printed and received in the year
(-) Banknotes destroyed during the year
Closing balance of banknotes in existence
(-) Banknotes on hand
Banknotes in circulation liability
Based on the above, banknotes on hand are accounted for as
a reduction of the balance of notes in circulation, on the basis
that the bank does not have an obligation for notes that are
not in circulation.
The following may lead to the accumulation of this balance:
• banknotes in a central bank’s vault or other stock locations
received from the printers and yet to be issued into
circulation;
• banknotes that were in circulation but have been received
back from commercial banks; and
• banknotes removed from general circulation and earmarked
for destruction.
Accordingly, banknotes in circulation are typically presented
on the face of the balance sheet by deducting notes on
hand from notes in existence. When newly printed notes
are received from the printer, their face value is added to the
balance of notes on hand until they are put into circulation.
DR Notes on hand
CR Notes in existence
The production costs of these notes are expensed because
they have been received and are available for circulation.
DR Expenses
CR Accounts payable
When they are issued into circulation – e.g. a commercial
bank has requested physical cash for its deposits – the
notes on hand account is reduced for the face value, thereby
increasing the net balance of notes in circulation.
DR Deposits – commercial banks
CR Notes on hand
Two of the banks surveyed disclosed a different accounting
treatment for newly printed banknotes that have not yet
been put in circulation. In these cases, their face value was
not initially recognised, and the cost of production of these
banknotes was recognised as a separate asset. As a result,
the face value of the banknotes is only added to the liability
and production costs are only expensed when the notes are
issued for the ?rst time.
For example, the Swiss National Bank presented notes on
hand as an asset, and its ?nancial statements disclosed the
accounting treatment as follows: “Freshly printed banknotes
which have not yet been put into circulation are recognised as
assets at acquisition cost and stated under banknote stocks.
Development costs that qualify for recognition as an asset
also fall under this balance sheet item. At the time a banknote
?rst enters into circulation, its cost is recognised as banknote
expenses.”
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9 Understanding policy instruments
39%
30%
32%
34%
36%
N
o
t
e
s
i
n
c
i
r
c
u
l
a
t
i
o
n
/
T
o
t
a
l
a
s
s
e
t
s
Figure 1.9: Average notes in circulation as % of total assets
0
10%
20%
30%
40%
2011 2010 2009 2008 2007
50%
Source: KPMG IFRG Limited, 2012
Trends in volumes of banknotes
The increase in banknotes in circulation is generally expected
to follow such factors as the trend of a country’s GDP and
in?ation. However, this may not always be the case because
of various market conditions. For example, the recent crisis
created an unusual increase in demand in various countries
as cash was withdrawn from commercial banks. Additionally,
emerging economies continue to show increased use of
ATMs, which also increases the demand for banknotes.
Figure 1.9 shows the average ratio for all central banks
of notes in circulation as a percentage of total assets.
Additionally, the distribution of the average ratio over the
5-year period (see Figure 1.10) demonstrates varying ratios on
an individual basis.
Figure 1.10: Distribution of the 5-year average
N
o
t
e
s
i
n
c
i
r
c
u
l
a
t
i
o
n
/
T
o
t
a
l
a
s
s
e
t
s
0%
20%
40%
Standard
deviation Average
60%
80%
100%
Source: KPMG IFRG Limited, 2012
Coins in circulation
Some central banks are responsible for issuing coins as well
as banknotes when legislation grants the coin privilege to the
central bank rather than to the government.
Of the central banks surveyed, eight had the right to issue coins
and therefore include coins issued as a liability – often grouped
with banknotes in circulation for presentation purposes.
However, four banks surveyed did not have the right to issue
coins and consequently recognised their coin holdings as an
asset. For example, the Deutsche Bundesbank disclosed that
“coins are received from the federal mints at their nominal
value for the account of the Federal Government”. Local laws
may stipulate an upper limit on the amount of coins that the
bank may purchase from a government, as excess purchases
could be seen as providing ?nancing to the government.
Demonetised banknotes
A number of factors make it dif?cult to accurately estimate
the amount of demonetised banknotes still in circulation.
This in turn could, over time, accumulate into a signi?cant
overstatement or understatement of banknotes in circulation.
For example, banknotes that are lost or destroyed without
the bank’s knowledge – e.g. through natural disasters – may
overstate the balance sheet liability. Conversely, the liability
may be understated when banknotes that are destroyed
include undetected forged banknotes.
Generally, banknotes are issued in series that are printed
and circulated for a limited period of time. When a new
series is issued, the old series is usually still considered legal
tender, either for a stated period of time or inde?nitely. The
?nancial statements of the central banks surveyed show that
accounting for banknotes from an old series is greatly affected
by whether or not such banknotes have a time limit to their
validity as legal tender, and the likelihood that they would
actually be exchanged for the newer series.
For example, the Bank of Canada included old series notes
in its balance of notes in circulation, and did not remove
them because they remain legal tender. The Bank of Israel,
however, recorded a gain of ILS 220 million in its 2010 ?nancial
statements (about USD 62 million at that time) for the face
value of notes that had passed the legal date for exchange and
were no longer valid for use.
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10 Current trends in central bank ?nancial reporting practices
This issue is also highlighted by the introduction of the
euro and subsequent removal from circulation of national
currency banknotes. For example, the balance sheet of the
Deutsche Bundesbank included a liability for Deutsche mark
notes still in circulation. However, its notes disclosed that in
2004 a portion of the notes were taken off the balance sheet
and recorded as income, because it was deemed highly
unlikely that these would ever be exchanged for euros. The
Banque de France still recognised French franc banknotes
as a miscellaneous liability, instead of notes in circulation,
because the notes were no longer legal tender but could still
be exchanged until 17 February 2012.
11 Understanding policy instruments
Future developments
• We expect domestic lending to continue playing an
important role, although new types of programmes
and interventions may emerge.
• Continued disclosures on these new programmes
will promote transparency and understanding of the
central bank’s role in market interventions.
• Policies for foreign currency assets, gold and
banknotes in circulation may remain consistent, but
their share of central banks’ balance sheets may
continue to vary as domestic currency operations
further develop.
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IFRS
IFRS-based
ECB Accounting
Guideline
Local GAAP or speci?c
legislation
33% (6)
22% (4)
17% (3)
28% (5)
2
Accounting frameworks
and policies
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12 Current trends in central bank ?nancial reporting practices
Key issues & ?ndings
• There was no consistent fnancial reporting
framework in use, and the adopted frameworks
were the signi?cant driver in the diversity in
accounting policies.
• More central banks are adopting IFRS, and banks
often used IFRS as a basis of reporting when
speci?c local legislation allowed them to choose
an appropriate accounting framework.
• The classifcation of fnancial instruments varied
widely with the reporting framework adopted,
but the measurement of these instruments was
mostly consistent across central banks.
• Central bank activities lead to specifc accounting
considerations and challenges, such as the
ownership of BIS shares and the treatment of
foreign exchange gains and losses.
• The income statements contained varying levels
of detail, but in general there appeared to be a
common theme of presenting a simple income
statement, with further disclosures in the notes.
• There was no common presentation for the
cash ?ow statement, and some disclosures
signi?cantly questioned the usefulness of this
statement for central banks.
2.1 Financial reporting frameworks
As IFRS becomes the recognised framework in many
countries, this trend is re?ected in the ?nancial reporting
framework adopted by central banks. Adoption of IFRS by
central banks allows comparison between these unique
institutions. However, due to their special legal status, central
banks may not be required to implement IFRS – even in
jurisdictions that have adopted IFRS as the ?nancial reporting
framework for other types of entities (such as publicly listed
companies).
Figure 2.1: Reporting frameworks
Source: KPMG IFRG Limited, 2012
Of the central banks surveyed, 10 adopted IFRS or a ?nancial
reporting framework that was based on IFRS (‘IFRS-based
framework’). The remaining eight reported under local
GAAP or their own speci?c legislation, which includes the
Eurosystem accounting principles and rules set out in the ECB
Accounting Guideline for central banks of the eurozone.
Of the 10 banks that reported under IFRS or an IFRS-based
framework, four disclosed IFRS as a basis for their own
individual framework, modifying certain requirements to better
re?ect the speci?c needs of their legislative environment. Such
modi?cations are often attributed to the special nature of central
bank activities and the perceived incompatibilities of IFRS with
the pro?t remittance model of central banks. Appendix A lists
the speci?c frameworks used by each central bank.
Main differences between IFRS and the ECB
Accounting Guideline
The ECB Accounting Guideline is a prominent example of a
framework that arises from speci?c central bank legislation,
and is used by all Eurosystem central banks. The table below
summarises major differences between the ECB Accounting
Guideline and IFRS.
Issue
6
IFRS ECB Accounting Guideline
Classi?cation of Requires classi?cation in categories de?ned as Available classi?cation options are similar to IFRS except that
?nancial assets initially designated at fair value through pro?t or loss there are speci?c requirements for illiquid equity shares and
(FVTPL), held-for-trading, available-for-sale, held-to- other equity held as permanent investments.
maturity, and loans and receivables.
Measurement of • Loans and receivables are measured at • Loans are measured at nominal value.
?nancial assets amortised cost.
• Illiquid equity shares and other equity held as permanent
• Unrealised gains and losses on FVTPL and held-for- investments are measured at cost subject to impairment.
trading ?nancial assets are included in pro?t or loss.
Asymmetric treatment whereby:
• Unrealised gains and losses on available-for-
• Unrealised gains are not recognised in proft or loss, but are
sale ?nancial assets are recorded in other
recorded in a liability revaluation account.
comprehensive income, except for foreign
currency differences on monetary assets and
impairment.
• Unrealised losses are included in the proft or loss account
if they exceed previous revaluation gains, thereby reducing
net income.
(This applies to both fair value measurements and foreign
exchange ?uctuations.)
Financial Comprehensive requirements to disclose: Speci?c disclosures are not explicitly identi?ed but harmonised
instrument
• the signifcance of fnancial instruments for an
disclosures of items of common interest to the Eurosystem
disclosures
entity’s ?nancial position and performance.
are recommended. (These disclosures are unde?ned in the
• qualitative and quantitative information
ECB Accounting Guideline.)
on exposure to risks arising from ?nancial
instruments (further discussed in section 5).
Provisions for Provisions are only allowed when the following Provisioning rules are less prescriptive and are determined
liabilities conditions are met: by the speci?c legislation that applies to each member of the
• an obligation exists as a result of a past event;
Eurosystem. General provisions are usually permitted for:
• it is probable that an outfow of resources will be
• foreign currency;
required to settle the obligation; and • interest rates;
• the amount can be reliably estimated. • gold price; and
• credit risk.
Components A complete set of ?nancial statements includes Does not require a cash ?ow statement and statement of
of ?nancial a cash ?ow statement and a statement of comprehensive income.
statements comprehensive income.
6. This comparison is based on information included in the European Central Bank’s April 2012 Monthly Bulletin. (http://www.ecb.int)
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13 Accounting frameworks and policies
The Eurosystem has considerable authority to set its own
accounting rules, and in this respect is similar to those
central banks which have adopted a IFRS-based framework
that is adapted to take into account the unique function of a
central bank.
IFRS modi?cations
Although the introduction of IFRS allows for greater
comparability, a number of central banks have made
modi?cations to IFRS on the basis that the objectives and
structure of their institution differs from those of commercial
banks and therefore modi?ed accounting and disclosures are
appropriate. Generally, these modi?cations are determined by
the individual bank and follow a de?ned legal process.
The four central banks that were classi?ed as using an IFRS-
based framework generally departed from IFRS in respect
of credit risk disclosures, accounting for foreign exchange
and gold, and/or the recording of provisions. These areas are
discussed in greater detail in sections 2.3, 3.2 and 5.2. The
following table summarises the IFRS departures that were
described in the ?nancial statements.
Central Bank Disclosed IFRS departures related to:
Bank of England • Constituent elements of the income statement
• Income and expenses
• Operating segments
• Contingent liabilities and guarantees
• Information on credit risk
• Related parties.
Bank of Chile • Ability to record global or individual provisions based on risk for certain investing operations.
• No statement of comprehensive income, statement of changes in equity or statement of cash ?ows.
Reserve Bank of New
Zealand
• Inventory [banknotes] acquired at no cost or nominal consideration is measured at current
replacement cost instead of the lower of cost and net realisable value.
South African Reserve
Bank
• Realised and unrealised gains and losses on gold and foreign exchange are not included in pro?t or
loss, because they are for the account of the government.
• Gold is valued per section 25 of the South African Reserve Bank Act at the statutory gold price and
is recognised as a ?nancial asset.
• Omissions related to IFRS 7 disclosures, including sensitivity analysis and credit quality.
• Assets and liabilities related to securities lending activities are disclosed but presented on a net basis.
Similarities can be seen between the IFRS departures
noted above and those of the ECB Accounting Guideline,
highlighting the areas of IFRS that are perceived by some
central banks to be dif?cult to apply in the context of central
bank activities, notwithstanding that IFRS is a general
purpose framework.
2.2 Securities and lending
Local and foreign currency assets
A broad range of ?nancial instruments were held by the
central banks surveyed. Some strictly held domestic currency
instruments, while others held a high proportion of foreign
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14 Current trends in central bank ?nancial reporting practices
currency instruments. Accounting for these instruments
varied widely. Accordingly, there was no common practice
for the classi?cation of the instruments across all central
banks. In general, equity securities are classi?ed into
categories measured at fair value, and loans and similar
instruments at amortised cost. The key accounting issues for
these instruments relate mostly to the treatment of gains
and losses when the instruments are revalued – i.e. due to
changes in market values or foreign exchange movements.
This is discussed in section 2.3.
Reverse securities repurchase agreements
The volume of reverse repurchase agreements
7
used by
some central banks has increased in recent years, following
the increase in demand for liquidity in markets. Accounting
for these instruments as balance sheet assets was mostly
consistent, as presented in Figure 2.2, and amortised cost
was the preferred valuation method.
8
In these cases, a central
bank would also not recognise the collateral received.
Figure 2.2: Accounting for reverse repurchase agreements
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
2
4
6
8
10
12
14
12
2
3
1
Value of
collateral
None or
undisclosed
FVTPL Amortised
cost
Source: KPMG IFRG Limited, 2012
As an example, the Reserve Bank of Australia disclosed
speci?c information on collateral, including the amount
of collateral that must be pledged. It also disclosed an
acceptable haircut
9
range of between 2 and 10%, which
increases with the risk pro?le of the securities.
Invariably, the value of collateral accepted is higher than
the cash lent. Further discussion of collateral disclosures is
included in section 6.
Securities repurchase agreements
Central banks may also borrow money from commercial
banks and give collateral in ‘securities repurchase
agreements’. Central banks may enter into these agreements
when there is excess liquidity in the market, typically by
taking a collateralised loan for a short period of time. The
treatment of this type of loan was largely consistent, with
most recognising a liability and not derecognising the assets
pledged. Figure 2.3 summarises the number of central banks
using each treatment.
Figure 2.3: Accounting for repurchase agreements
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
2
4
6
8
10
12
14
16
No balances at
reporting date
Derecognise
assets
Record liability
1
15
2
Source: KPMG IFRG Limited, 2012
2.3 Gold and foreign exchange
Gold
Of the14 banks surveyed that held gold reserves (see section 1.2),
13 held gold bullion or coin either as the sole form of gold holding
or in combination with gold receivables. The Federal Reserve
Banks only reported gold receivables, because they hold gold
certi?cates issued by the Secretary of the US Treasury – these
are backed by gold owned by the Treasury and are valued in the
?nancial statements at a ?xed rate set by law (USD 42 2/9 per ?ne
troy ounce, or about 3% of market value at 31 December 2011).
These 13 banks measured gold on a fair value or fair value-
related basis, although there were some variations in the
method used and the source of the market price. Several
central banks valued their gold holdings using the London
PM gold ?xing, quoted in US dollars, but there was some
diversity in practice. For example, the Reserve Bank of India
7. The term ‘reverse repurchase agreement’ is used throughout this study, and is used interchangeably with ‘collateralised loans’. These are usually loans having short- to medium-term maturities with principal
repayment at the end of the term and provide market liquidity. They are usually secured with marketable securities as collateral.
8. This includes amounts classi?ed as loans and receivables and as held-to-maturity, because they result in the same measurement under IFRS. It also includes amounts recognised at nominal amount plus
accrued interest, because the accounting result is the same.
9. ‘Haircut’ refers to the percentage reduced from the collateral’s fair value, based on the risk associated with the collateral received.
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15 Accounting frameworks and policies
valued its gold at 90% of the daily average price quoted
at London for the month, while the Bulgarian National
Bank disclosed its treatment of gold as follows: “With
regard to the set characteristics of the monetary gold, the
management considers that IFRS does not provide a reliable
base for the reporting of this asset. Therefore, pursuant to
the requirements of IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors, the Bank de?nes the
recognition and valuation of the monetary gold as a ?nancial
asset reported at fair value through pro?t or loss as the most
reliable and appropriate basis for subsequent valuation of this
?nancial asset.”
However, banks used different methods to recognise changes
in fair value.
• fair value through proft and loss (FVTPL)
• fair value through other comprehensive income (FV OCI)
• fair value with changes recorded to liability accounts (FVL).
Figure 2.4 shows the number of banks that elected to use
each method. The most common method for recognising
the changes in fair value was FVTPL, followed by FVL. Many
central banks treated gold valuation adjustments consistently
with foreign currency translation adjustments.
Figure 2.4: Accounting for gold
Measurement basis
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
0
1
2
3
4
5
6
7
8
FVL FV OCI FVTPL
7
4
2
Source: KPMG IFRG Limited, 2012
Treatment of foreign exchange gains and losses
Foreign currency assets and liabilities may make up a
considerable portion of a central bank’s balance sheet, so the
accounting treatment of gains and losses on those instruments
is usually a signi?cant accounting policy for them. Of the
banks surveyed, 11 accounted for gains and losses on foreign
exchange through pro?t or loss – i.e. the income approach
– and this accounting treatment was driven by the fact that
banks reporting under IFRS are required to follow this method.
Under the income approach, banks generally present realised
and unrealised foreign exchange gains and losses in the
income statement. However, if a bank applies IFRS, then the
accounting for foreign exchange translation on non-monetary
items requires the remeasurement to follow the instrument
– i.e. for an available-for-sale asset that is revalued through
other comprehensive income, any change that relates to
changes in foreign exchange rates is also recognised in other
comprehensive income.
The liability approach differed
10
in its application among the
remaining seven banks; however, all were similar in that
primarily, foreign exchange ?uctuations were recorded in
a balance sheet liability account. In some instances, gains
and losses were not treated symmetrically. For example, the
Banque de France (along with the Deutsche Bundesbank
and the European Central Bank) disclosed that unrealised
gains on foreign currency are recorded as liabilities in the
revaluation account, while unrealised losses in excess of
gains are recognised in net income; valuation is performed
on a currency-by-currency basis and different currencies are
not netted against each other. The South African Reserve
Bank treated foreign exchange pro?ts and losses somewhat
similarly because they were “for the account of government
and, consequently, all these pro?ts and losses are transferred
to the [gold and foreign exchange contingency reserve
account]”. This effectively means that the gains and losses
are not to be distributed along with other pro?ts to external
shareholders.
Figure 2.5: Treatment of foreign exchange gains and losses
Income approach
Liability approach
61% (11)
39% (7)
Source: KPMG IFRG Limited, 2012
10. Gains and losses through a liability account. See section 3.2 for a related discussion on reserves.
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16 Current trends in central bank ?nancial reporting practices
2.4 Other ?nancial instrument-related
issues
Accounting for holdings of BIS shares
The Bank for International Settlements (BIS) acts as a bank
for central banks, providing banking services, as well as being
a forum for collaboration. The BIS currently has 60 member
central banks, all of which hold shares in the BIS that give
them representation and voting rights at general meetings.
Of the 18 banks surveyed, 16 had shareholdings in the BIS,
and there was variation in the accounting policies that they
used to measure these shares.
Figure 2.6 shows how the surveyed banks accounted for
these shares. Of the banks reporting the BIS shares at fair
value, three different approaches were noted. As shown in
Figure 2.7, three banks used a discounted net asset value
to determine the fair value; the remaining two used other
methods, including a dividend yield model, because the BIS
shares are subject to a yearly dividend. The discounted net
asset value method discounts the shares’ net asset value by
30%. This takes into account a decision by the International
Court at The Hague relating to a share repurchase by the BIS
in 2001, which has since been used as the basis for setting the
transaction price when new shares are issued. This method
considers that the legal decision has ultimately set the
assigned value if shares were to be traded, because the legal
precedent encourages a purchaser to buy at a price not higher
than that value, while a seller would not sell below that value.
Figure 2.6: Measurement basis of BIS shares
Fair value
Cost
Undisclosed
31% (5)
50% (8)
19% (3)
Source: KPMG IFRG Limited, 2012
Discounted net
asset value
Other fair value
40% (2)
60% (3)
Figure 2.7: Fair value method for BIS shares
Source: KPMG IFRG Limited, 2012
Central bank issuance of debt
A central bank may have the right to issue debt securities,
and of the 18 central banks surveyed, six had actually done
so. The instruments issued primarily consisted of bonds and
promissory notes. In comparison to other instruments used
by central banks, the volume of own debt issued was typically
relatively small, although there were exceptions. For example,
the Central Bank of Chile’s debt securities balance was
greater than that of banknotes and coins in circulation and
represented more than half of its total assets.
For the banks surveyed, there was either no disclosure at all
on the reason for issuing debt, or the disclosure was very
brief. For example, in its accounting policy note, the Bank of
Mauritius states that its savings bonds, bills and notes are
“issued for liquidity management.”
Accounting for impairment of assets
Central banks have traditionally only invested in lower risk
?nancial assets – e.g. very highly-rated money-market
instruments, T-bills, and government bonds. But with the
crisis, they have moved away from this basic policy, and
have therefore taken on more risk by advancing longer-term
loans, expanding the eligibility of collateral, or making outright
purchases of corporate bonds. In addition, many previously
highly-rated instruments have suffered downgrades in credit
quality. Because of these new developments, the impairment
of ?nancial instruments has become more important. Of the
banks surveyed, 11 disclosed an impairment policy.
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17 Accounting frameworks and policies
The European Central Bank held investments under the SMP,
and valued them at amortised cost subject to impairment.
Annual impairment tests were performed to estimate the
recoverable amount at the 2011 year end, and no impairment
losses were recorded. Notably, the bank maintained a
provision for foreign exchange rate, interest rate, credit and
gold price risks, and at 31 December 2011 it transferred an
amount of EUR 1.2 billion to the provision out of income
arising from securities purchased under the SMP and from
euro banknotes in circulation. Thus, the bank may be able to
provide for possible future losses associated with the SMP
portfolio, even though none have been incurred at year end.
This re?ects a fundamental concept in the bank’s model for
recording provisions as a ?nancial buffer (as discussed in
section 3), contrasting with a pure incurred-loss model that is
required under IFRS.
2.5 Analysis of income and expenses
Traditionally, the analysis of a central bank’s ?nancial
statements has focused on the balance sheet rather than
11. For the purposes of this section, we have ignored the statement of other comprehensive income for central banks that
report under IFRS.
the income statement because, unlike a commercial bank,
a central bank’s main objective is not to generate pro?ts.
Nonetheless, the income statement is a useful tool, because
the transparency of signi?cant items that affect net income
can help readers to understand a central bank’s activities and
its use of resources.
Income statement presentation
11
The structure of the income statement varied amongst
central banks, with each style of presentation emphasising
different measures of performance. For the banks surveyed,
income statements were generally presented in one of the
following forms:
• Traditional: total revenues less total expenses to arrive
at net pro?t.
• Net: income and expenses of a similar nature are grouped
and presented on a gross basis, with several ‘net’ subtotals.
• Hybrid: a mixture of the traditional and net presentation,
usually with a particular focus on the net position from
interest.
Traditional Net Hybrid
Revenues
Interest revenue
FX gains
Other, etc.
Total revenues
Expenses
line 1
line 2
line 3
Total expenses
Net pro?t
Interest revenue
Interest expense
Net interest income
Realised gains/losses
FX gains/losses
Net result of ?nancial operations
Other income
Expense 1
Expense 2
Net pro?t
Interest revenue
Interest expense
Net interest income
Other revenues
Expenses
line 1
line 2
line 3
Total expenses
Net pro?t
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18 Current trends in central bank ?nancial reporting practices
Among the 18 banks surveyed, the net method was the
most commonly used (see Figure 2.8). The European
Central Bank, Deustche Bundesbank, and Banque de France
have adopted this presentation method because the ECB
Accounting Guideline sets out standard formats for the
balance sheet and pro?t or loss account. The advantages
of a net presentation are an increased focus on each type
of activity and the ability to assess the impact of each
activity on the bank’s results – e.g. the result from lending
and borrowing (net interest), ?nancial transactions, or
foreign exchange operations. The hybrid method places a
similar focus on net interest, while maintaining a traditional
presentation for other streams of income and expenses.
Figure 2.8: Income statement presentation
0
1
2
3
4
5
6
7
8
9
Hybrid Net Traditional
Presentation style
N
u
m
b
e
r
o
f
c
e
n
t
r
a
l
b
a
n
k
s
4
6
8
Source: KPMG IFRG Limited, 2012
Segment information
There was no indication that any of the surveyed central banks
classi?ed any of their activities into operating segments (as
de?ned by IFRS 8 Operating Segments
12
). None reported
segment information, although the Bank of England and the
Reserve Bank of India had unique presentation approaches
as discussed below. The split of activities between domestic
currency operations and foreign currency operations was
often an important consideration. Four of the surveyed banks
segregated foreign and domestic assets on the balance sheet.
For example, the Bank of Mauritius had a separate heading
and subtotal of foreign assets presented ?rst on the balance
sheet, followed by domestic assets. This is consistent with the
fact that the majority of its balance sheet was held in foreign
currency.
As for segmental reporting that serves a similar purpose to
IFRS 8, The Bank of England presented two separate sets of
?nancial statements – one for the Banking Department and
one for the Issue Department. In effect, this presentation
earmarks the speci?c assets that it holds against the liability
of banknotes in circulation (thereby giving an indication of
seigniorage income), and groups the remaining operations
under the Banking Department. Notably, this presentation
was adopted to satisfy statutory requirements dating back
to 1928.
The Reserve Bank of India had a similar segregation, although
it presented one set of ?nancial statements and only broke
down the balance sheet between the two functions.
In both cases, the liabilities on the issue department’s balance
sheet consisted exclusively of banknotes in circulation. The
assets were slightly more diverse, and consisted of various
local and foreign currency assets – including gold, government
securities and other securities.
Income line items
On average, the surveyed central banks displayed ?ve
income line items, ranging from one (two banks) to 19 (one
bank). Nearly every bank presented a speci?c line for interest
revenue, and occasionally this was broken down into more
detailed levels of interest revenue, such as interest on foreign
assets and interest on domestic assets. The focus on interest
revenue is not surprising given the importance of interest-
bearing assets for central banks, since they comprise the
majority of their assets held.
Given the signi?cance of foreign currency assets to many
central banks, foreign exchange gains and losses are also
important, with many banks reporting them as a separate
line item. Dividend income was also commonly found on
the income statement; however, it was often relatively
immaterial, because central banks generally do not hold
signi?cant volumes of equity instruments. Dividends from the
BIS shares were often the only source of dividend income.
Expense line items
Of the 18 central banks surveyed, the average number of
expense line items disclosed was seven and ranged from one
(one bank) to 17 (one bank). Similar to interest revenue,
interest expense is important to most central banks, with
16 of the 18 banks surveyed presenting interest expense as
a separate line.
Producing and issuing banknotes is a primary function of
central banks, and these costs are also commonly presented.
Eight of the surveyed banks presented this as a speci?c line
on the face of the income statement.
The majority of central banks surveyed also presented
operational and general and administrative expenses such
as staff costs and depreciation in varying levels of detail.
However, the presentation was generally similar to that for
typical pro?t-oriented entities.
12. IFRS 8 is only applicable for entities with debt or equity instruments in the public markets or that are in the process of issuing such
instruments.
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19 Accounting frameworks and policies
Supporting income statement disclosures
Additional information was often disclosed in the notes to the
?nancial statements, to provide more background information
on central bank operations – particularly for less detailed
income statements.
The notes were sometimes used to provide a different
perspective of the income statement items presented on
the face of the statement. For example, the revenues and
expenses of two central banks were categorised by nature
on the face of the income statement but were categorised by
function in the notes. Functional presentation helps the reader
to assess how resources are used in the various functions of
the central bank, such as monetary policy, ?nancial system
supervision, currency management and operations, and
payment and settlement services.
The Bank of England presented only one line – pro?t before
tax – in the income statement of the Banking Department (not
including tax expense), but the notes included a more detailed
breakdown of income and expenses by type. This resembled
the traditional breakdown, with revenues listed by type
followed by expenses.
The most common trend noted was the tendency to
include a moderate level of detail on the face of the income
statement, and supplemental information in the notes. The
notes often included a narrative description of the sources
(by type of instrument) of revenue and expenses and in
some cases analysis of the changes in the balance.
2.6 Presentation of cash ?ow statements
The presentation of a cash ?ow statement varied among
the banks surveyed, depending largely on the reporting
framework adopted. Figure 2.9 shows the percentage of
central banks surveyed that did not present a cash ?ow
statement and, for those that did, the split between use of
the direct method (i.e. presenting gross cash receipts and
gross cash payments) and the indirect method (i.e. starting
with net income and making adjustments for non-cash
items). IFRS requires a cash ?ow statement, and all banks
reporting under IFRS included the statement. Those that did
not present a cash ?ow statement commonly gave one of
two explanations. The ?rst was that the statement provides
no additional information beyond what is already presented
on the face of the ?nancial statements. The second was that,
given the unique role of central banks as the ultimate source
of domestic liquidity, a cash ?ow statement is not meaningful.
Direct method
Indirect method
None
33% (6)
11% (2)
56% (10)
Figure 2.9: Presentation of cash ?ow statements
Source: KPMG IFRG Limited, 2012
Although IFRS-based, the Central Bank of Chile does not
present a cash ?ow statement, which is a stated departure
from IFRS. However, the bank included a ‘statement of
variation in monetary base and international reserves’ in the
notes to the ?nancial statements. Rather than showing the
traditional operating, investing and ?nancing movements
of cash and cash equivalents in the cash ?ow statement,
this statement showed changes in the monetary base and
international reserve assets grouped by increases and
decreases related to these accounts.
Future developments
• As more countries adopt IFRS, the number of central
banks reporting under IFRS or IFRS-based frameworks
is likely to increase.
• The new fnancial instruments standard (IFRS 9, which is
expected to be applicable in 2015) will be signi?cant for
central banks, because most balance sheet items fall
within the scope of these requirements.
• The International Accounting Standards Board
is currently deliberating a new expected loss
impairment model, which is more focused on
forward looking information than the current
requirements and may impact central banks’
assessments.
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20 Current trends in central bank ?nancial reporting practices
• As more countries adopt IFRS, the number of central
banks reporting under IFRS or IFRS-based frameworks
is likely to increase.
• The new fnancial instruments standard (IFRS 9, which is
expected to be applicable in 2015) will be signi?cant for
central banks, because most balance sheet items fall
within the scope of these requirements.
• The International Accounting Standards Board
is currently deliberating a new expected loss
impairment model, which is more focused on
forward looking information than the current
requirements and may impact central banks’
assessments.
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21 Accounting frameworks and policies
3
Capital
management
Key issues & ?ndings
• Central bank capital targets remain largely
unde?ned.
• There is no recognised guidance or set practice
for calculating the appropriate levels of capital for
a central bank.
• When not specifcally prohibited by the fnancial
reporting framework, liability accounts were often
used to record provisions as an alternative to
using equity reserves.
• Specifc legislative requirements also affected
the various methods for calculating reserves and
?nancial buffers.
3.1 Capital
Capital management for central banks can be challenging.
Laws governing their operations often require annual pro?ts
to be remitted to the government, limiting the amount of
capital that can be accumulated as retained earnings. This
has been particularly challenging for central banks that have
moved to IFRS and that have suffered ?uctuations in pro?ts
due to certain unrealised gains and losses being taken into
income. Central banks generally manage their capital by
using discretionary and non-discretionary reserves (equity
capital) and provisions and revaluation accounts (liabilities)
to offset unrealised gains and losses, and to cover risks that
may crystallise in the future – thereby avoiding the potential
for negative equity. Central banks’ capital structures are often
directed by speci?c, and possibly unique, legislation in each
country; however, on closer inspection common patterns
emerge, as the following results show.
Overall capital levels
Capital can generally be broken down into three categories:
stated capital
13
, retained earnings
14
and reserves. In
general, stated capital is set by the central bank law and
is established on creation. Retained earnings accumulate
when a bank is not required to remit all of its earnings to
shareholders, and therefore results in a build-up of capital.
Reserves can often be used to manage the effect of yearly
variations in pro?t or loss and net earnings to be remitted to
the government as a shareholder.
13. This includes statutory reserves, as these types of reserves are usually ?xed by legislation.
14. This includes dividends (declared but not yet paid), as some central banks present them as a separate line in the ?nancial statements.
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22 Current trends in central bank ?nancial reporting practices
Stated capital
Non-discretionary
reserves
Discretionary
reserves
Retained earnings
21%
48%
21%
10%
Figure 3.1: Average distribution of capital
Source: KPMG IFRG Limited, 2012
The average breakdown of capital for the banks surveyed
is shown in Figure 3.1.
15
The actual breakdown for individual
banks varied signi?cantly due primarily to differences in
statutory requirements and capital management strategies.
However, some trends emerged when looking across the
population surveyed.
The breakdown in Figure 3.1 highlights the signi?cance
of reserves in relation to total capital.
16
Reserves may be
seen as tools to manage the distributable pro?t and the
amount remitted to the government. By allocating amounts
to reserves, either before or after arriving at net income (as
described in section 3.2), banks manage the timing of their
remittances to shareholders, so that accounting results do not
con?ict with the overall remittance model.
15. Banks with negative capital were excluded from this analysis.
16. For this analysis, we have treated reserves, provisions, and revaluation accounts jointly as reserves.
17. See footnote 16 is respect of reserves included in capital.
18. For more information, see BIS’s international regulatory framework for banks. (http:// www.bis.org/bcbs/basel3.htm)
Minimum capital levels
Figure 3.2 shows the ratio of capital
17
to total assets.The bars
represent the number of banks whose ratio falls into each
range. The ‘10% 5% to 10% 0% to 5%